Heres How To Generate Regular Income Efficiently

One of the biggest challenges for the retirees as well as self-employed people in the present times is to generate regular income out of their investments. Although there are a number of options available to do so, there are pros and cons of investing in each one of them. For example, annuity plans of insurance companies and other options like fixed deposits (FDs), Post Office Monthly Income Scheme (PO MIS) and Senior Citizen Savings Scheme(SCSS) offer fixedincome. However, the returnsare low and the post- tax returns are even lower as income generated is taxed at one’s applicable tax rate. 

Hemant Rustagi, Chief Executive Officer, Wiseinvest Advisors

Then, there are market-linked hybrid products offered by mutual funds that have the potential to generate higher incomeas well as growth, but the quantum and frequency can be erratic. Besides, the volatility in the market can negatively impact the value of the portfolio.Therefore, the key is to select these options in a proportion that creates the right balance between risk and reward. Let’s understand more about each of these options and analyse how these can contribute to income generation process. 

Annuity: Annuity plans of insurance companies offer a series of periodic payments to the annuitant from a lump sum corpus. There are two basic types of annuities: deferred (pay outs start after a specified period) and immediate (pay outs start immediately).While the positives are fixed return, no cap on investment and no reinvestment risk, not having access to the capital and annuity being taxable are major negatives. 
Bank Fixed Deposit : Bank FDs are one of the most popular investment options for investors in our country. One can opt to get the interest every month, quarter or on an annual basis. While the positives of investing in bank FDs are fixed interest, convenient way of investing, low credit risk and possibility to exit in case of financial emergency, taxability of interest at one’s applicable tax slab and reinvestment risk are negatives. 
Post Office Monthly Income Scheme (POMIS) : POMIS is a good option for those looking for fixed income and safety of capital. The investment tenure is for 5 years. The maximum amount that can be invested is `4.5 lakh. However, for a joint account, one can invest upto `9 lakh. Currently, it offers an interest rate of 7.7 percent. 
Senior Citizen Saving Scheme (SCSS) : SCSS is a popular investment option for senior citizens. The interest is paid out on a quarterly basis. While the tenure of the schemes is 5 years, it can be extended for an additional period of 3 years. One can invest a maximum of `15 lakh in individual capacity and `30 lakhunder a joint application. Currently, it offers an interest rate of 8.7 percent. 

Mutual funds : Mutual funds offer a variety of schemes for investors to invest for varied time horizons and risk profiles. Ideally, someone who is looking to generate regular income with a restricted exposure to equity should opt for hybrid schemes. SEBI has categorised them in six categories. These are conservative hybrid funds, balanced hybrid funds, aggressive hybrid funds, dynamic asset allocation or balanced advantage fund, arbitrage funds and equity savings funds. 

The major difference between these funds is the asset mix and the level of exposure to each of the asset class. These funds allow investors to choose between dividend and growth options. While dividend option is apt for those looking to generate regular income, they need to contend with the dividend distribution tax (DDT), that is, 28.84 percent for debt-oriented funds and 10 percent for equity and equityoriented funds. DDT is paid by the mutual fund, and hence, the dividend received by investors is tax-free in their hands. However, it impacts their returns as it is paid out of the NAV. Being open-ended funds, these are highly liquid investments. Besides, there is a potential of capital appreciation, which is not possible in traditional options. However, the frequency and quantum of dividend can be erratic at times. During the current market-like situation, even the value of the portfolio can go down for a prolonged period. 

A Systematic Withdrawal Plan (SWP), wherein investment is allowed to grow under the growth option for a period that makes gains eligible to be taxed as long-term capital gains and, thereafter, instructionis issued to the fund to redeem a fixed amount every month. The SWP can bring certainty in quantum and frequency of income as well as reduce the tax incidence as compared to DDT paid by the fund. 

Choose your options carefully : For those who needto generate income, the frequency and the quantum must have certainty. Besides, factors like the potential of capital growth and tax efficiency of returns ensure that your money outlasts you. Therefore, an ideal combination would be to allocate around 30-40 percent to hybrid mutual funds and the rest to the traditional options. Hemant