Earn Rs 50,000 Per Month By Investing in MFs !

It is our deep-seated desire to earn an extra income. DSIJ explains how investments in mutual funds can be used to satisfy this desire under different scenarios. 

‘Get lifetime income of Rs120,000 p.a by investing in our retirement plan’. This is a typical marketing message you might be getting in your inbox or message box. This is usually broadcast by many insurance and mutual fund houses to entice investors into investing in their plans. They try to exploit our deep-rooted desire to make extra income in a legitimate way. There are various ways of getting an extra income; however, many of you do not know that your savings channelised into proper investment avenues can also help you to earn that extra income and fulfil your wishes. 

Investment in mutual fund can help you to earn that extra income. If historical data can give any clue to the future returns, it is reasonable to expect that a person who has invested in equity mutual funds can double his money every five years. Considering the benchmark index Sensex as proxy for equity returns, since 1979 the Sensex has given annualised return of 15.5%. In other words, if you had invested in an index fund that tracks the S&P BSE Sensex in 1979, and you had never withdrawn the money, you would have average returns of 15.5 per cent per year. At that rate, you would double your money every four years and seven months. This statement should not be taken literally as this is a long term average. You may find wild swings in-between, such as a fall of 55% in the year 2008 and 85% in the following year. To capture the long term average, you need to remain invested for a long duration. 

The investment in mutual fund, if planned properly, can help you to earn that extra income. Nonetheless, for a pessimistic investor, this (15.5 per cent return) is too high and unlikely to give correct picture of the future returns. Moreover, equity is not the only asset class for investment and a conservative or risk-averse investor might not put all his investments into equity. So, what is the return that we can expect going forward and how can we use that to plan our investments that helps us to have second income in different conditions? The following paragraphs will answer all your questions. 

What Is The Realistic Return I Can Expect? 

The future returns to expect from your investment will primarily depend on your risk profile which, in turn, determines your investment avenues and return expectations from such instruments. For example, an aggressive investor may invest only in equities and that too in small-cap funds, which is expected to give better returns than debt funds and large-cap dedicated funds in the long run, but it also carries higher risk. Nonetheless, a conservative investor may only go for long-term debt funds that offer lower returns, however, with lower volatility. 

Assuming you are a moderate risk taker and invest in both equity for growth and debt for stability of returns, what is your average expected annual return? You would invest 50 per cent in equity and 50 per cent in debt. Further, if we classify equity as an asset class, then you would invest 20 per cent in large-cap equity mutual funds, 20 per cent in multi-cap equity mutual funds and 10 per cent in mid-cap equity mutual funds. For debt mutual funds, 10 per cent would be invested in ultrashort- term debt mutual funds, 20 per cent in short-term debt mutual funds and 20 per cent in gilt funds. 

With the above asset allocation, you can expect an average weightage return of 12.7 per cent. This may change for aggressive and conservative investor depending on their asset allocation plan and selection of investment avenues. 

How much to invest to earn twice your income. 

As the cliché goes, one size does not fit all, we assume not all investors have similar situations and requirements and hence we have taken three hypothetical situations. These are three situations when you want an income equivalent to your current income. 

The first situation explains when you are retiring and want an income in your golden days to maintain your lifestyle. In the second situation, it may happen that you want your income to be more in future to fulfil your expected increase in the financial needs. There is also a case when your income generating life is shorter and you want your income earned during this period to be utilised when you are not earning. 

For every reason mentioned above, you need to save and invest. There are various thumb rules that can guide your investment decisions. For example, there is a general rule that is especially useful for young individuals to manage their earnings better. According to the rule, from the total salary one earns after all the tax deductions, one should spend 50 per cent on living expenses like bill payment, food, etc. The other 20 per cent should be used to fulfil short term goals and create an emergency fund, while the rest should go into investment for long term goals. 

If historical data can give any clue to the future returns, it is reasonable to expect that a person who has invested in equity mutual funds can double his money every five years. Considering the benchmark index Sensex as proxy for equity returns, since 1979 the Sensex has given annualised return of 15.5% 

Situation 1 

Your Income after Retirement 

Retirement planning is essential for everyone. It remains one of the primary financial goals for one and all. Barring few exceptions, everyone desires to retire one day. The retirement planning is divided into two stages. First is the ‘accumulation’ stage and the second is the ‘distribution’ stage. Under the accumulation stage, you keep on investing, while at the distribution stage, you withdraw from the corpus.

The amount you need to invest currently will depend on various parameters. First is, when will you start investing? The earlier you start investing, the lower will be the investment amount, assuming that you retire at the same age. In our example, we have assumed you are 30 years of age and will retire at the age of 60. The second factor that decides your investment amount is how much you need after retirement. If currently your need is Rs30,000 per month, once you retire after a certain age (60 years in our case) you need Rs1,82,643 every month after adjusting for inflation (assumed @6% p.a) to maintain the same level of expenses and your lifestyle.

The next big factor is your return expectations. We have divided this into two stages; first, when you are accumulating and, next, when you are withdrawing. We have been conservative in our assumption and assumed that during the accumulation stage our return on investment would be 10%, while at the distribution stage, you will be shifting much of your corpus into some safer investment that may yield lower returns (8% in our example). 

With the above assumption, you need to invest Rs11,849 every month so as to maintain the same level of expenses (Rs30,000 currently) after your retirement. There may also be a case where you want to invest a lump sum to get the same amount. For this, you need to invest Rs14.2 lakh to get the same monthly amount after your retirement at the age of 60. 

The above is the base case of our assumption; however, the following table gives you different scenarios with respect to your age and monthly expense requirement. All other assumptions, such as inflation, growth of your investment and life expectancy remains the same. In case the inflation goes up, you need to invest more. Even if your life expectancy goes up, you need to invest more. 

Your required SIP (Rs) for different age and monthly expenses 

Situation 2 

Additional Income It is not always necessary that you need to invest only for your retirement. If you have started your career and do not have much of financial liabilities, you can save more. This saving, if invested wisely, can help you to get extra income at some future stage of your life. This extra income could help you to offset some of your increased expenses. Hence, you need to invest more currently so that you could earn extra income going ahead.

In the above case too, we have the same assumptions; however, we have not taken inflation into account as we are taking a case where we need a particular amount at the end of a certain period. In the above example, we have assumed that in addition to the following goal, you are already investing in retirement planning and this investment is from 25 to 40 years of age, after which you need that extra income of Rs20,000. Moreover, if you want to do a lumpsum investment, you need approx. Rs3.82 lakh to earn Rs20,000 every month after 40 years of age. 

The following table again constructs different scenarios in terms of age when you start your investment and extra income that you can earn.

Situation 3 

In addition to the above, there are cases where persons have very short and uncertain career. They do not have a long career to plan their future financial goals. Nevertheless, in this short period, they may earn exceptionally high income. Some such cases include careers of sportsperson, models, small-time actors, air hostesses, etc. Investment in mutual funds can be used by them to utilise their earnings during their short career span to support themselves and their needs for a lifetime. We start with the same assumptions with slight tweaking. The current age is 22 years and he will earn till 40 years, and after that, he will rely on the corpus accumulated between 22-40 years to fulfil his financial goals. Since their earnings are erratic, they can use systematic transfer plan (STP) to invest in mutual funds. They can invest in some liquid debt fund and can use STP to transfer to the required MF schemes.

The above table clearly shows that one needs to invest almost Rs1.7 lakh every month to get Rs80,000 equivalent of current amount once he ceases to earn at the age of 40 years. The reason for such higher SIP is because he has a smaller accumulation phase and longer distribution phase. Hence, in the table below depicting different scenarios, we have used the age at which you retire instead of age at which you start earning. It clearly shows as your working age increases, your monthly SIP requirement declines.

Apart from the post office monthly income scheme (PO-MIS), there are few options from where you can earn extra income on a consistent basis. Nonetheless, the PO-MIS puts various restrictions on the amount and maturity. Some of the high dividend yielding companies' shares can also be used for a regular income; however the dividends are received once in a year, or at best, four times a year. Against these alternatives of earning an extra income, investment in mutual fund offers the best way. You can earn Rs50,000 every month, by investing as little as Rs10724 every month if you start investing early. The best way to earn such income in current tax structure is, using systematic withdrawal plan (SWP) offered by mutual funds. They can be used in an effective way to manage your cash flows and generate an extra income.