Is it possible to get monthly income with index funds?
Every one of us wishes to take early retirement but still be able to draw a specific monthly income. And can index funds help in achieving the same? According to SEBI (Securities and Exchange Board of India) index funds are those which have minimum 95 per cent of the total assets invested in the securities of a particular index it is tracking.
Let us take an example to understand whether it is possible for index funds to generate wealth and allow you to generate regular monthly income. Say you wish to withdraw Rs. 30,000 per month in Today’s terms and wish to increase the same with 7 per cent inflation rate and you are planning to start withdrawing after 15 years and wish to withdraw for the next 30 years. This means that you have 15 years for accumulation and 30 years to distribute the accumulated amount. Index funds over a period of 10 years have generated CAGR (Compounded Annual Growth Rate) of 15.35 per cent.
So, considering inflation after 15 years you would be withdrawing Rs. 83,000 per month which would increase with assumed inflation rate every year over the next 25 years. The total corpus you require after 15 years to start withdrawal is Rs. 1.09 crore, assuming the index funds would continue providing the same rate over the next 25 years. So, now to achieve this corpus you can do SIP (Systematic Investment Plan) of Rs. 16,000 per month for the next 15 years in an index fund. On the contrary, if you have a lumpsum amount of Rs. 13 lakhs then you can invest the same in index funds and achieve the corpus of Rs. 1.09 crore which would, in turn, help you in withdrawing your desired income per month.
Before making any investment decision it would be wise to assess your risk profile and take a look at your financial plan. Index funds would be better for conservative risk takers and to some moderate risk takers as well. But aggressive risk takers must avoid investing in index funds rather they should replace these index funds with large-cap funds or large and mid-cap funds.