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Can I Generate Passive Income of 50K/Month from 40K Savings in 5 Years?

Ramalingam Kalirajan |8103 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jan 23, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Jan 23, 2025Hindi

Hi, I am 31 male, with monthly saving of 40k. Please suggest a strategy to earn at least 50k per month passively from this saving after next 5 years.

Ans: You want to generate Rs. 50,000 as passive income in 5 years from Rs. 40,000 monthly savings. This requires a well-planned investment strategy and consistent contributions. Let us create a detailed roadmap to help you achieve this.

Understanding the Target
Passive Income Requirement

You aim for Rs. 50,000 monthly passive income in 5 years.
This translates to Rs. 6 lakh annually.
Corpus Needed

To generate Rs. 6 lakh annually, a corpus of Rs. 1.2 crore to Rs. 1.5 crore is required.
This depends on the investment’s withdrawal rate and returns.
Investment Timeline

With a 5-year horizon, focus on growth investments with manageable risks.
Recommended Investment Strategy
1. Focus on Equity Mutual Funds
Higher Returns Potential

Equity mutual funds provide inflation-beating returns over the long term.
Allocate 60-70% of your savings to equity funds for higher growth.
Choose Actively Managed Funds

Actively managed funds outperform index funds due to professional fund management.
Diversify across large-cap, mid-cap, and small-cap funds.
SIP Methodology

Continue systematic investments to reduce market volatility impact.
Invest Rs. 25,000-30,000 monthly into equity mutual funds.
2. Diversify with Hybrid Funds
Balance Between Risk and Stability

Hybrid funds provide a mix of equity and debt, reducing portfolio volatility.
Allocate 20% of your savings to hybrid funds for stable growth.
Ideal for Medium-Term Goals

These funds suit a 5-year investment horizon.
They offer steady returns with moderate risk exposure.
3. Add Debt Funds for Stability
Preserve Capital for Passive Income

Allocate 10-15% of your savings to high-quality debt mutual funds.
Debt funds provide stable returns with lower risk.
Tax Efficiency

Long-term capital gains from debt funds are taxed as per your income tax slab.
Invest in debt funds that align with your tax planning goals.
4. Systematic Withdrawal Plan (SWP) for Passive Income
Generate Monthly Income

After 5 years, use an SWP to draw Rs. 50,000 per month.
SWP allows you to withdraw a fixed amount while keeping the corpus invested.
Tax Benefits of SWP

Withdrawals are taxed only on the gains, not the principal.
This makes SWP a tax-efficient option for passive income.
Creating a Balanced Portfolio
Equity-Oriented Portfolio
Diversification

Invest in multiple equity fund categories to spread risks.
Avoid investing in just one type of fund.
Avoid Index Funds

Index funds mirror the market but may not maximise returns.
Actively managed funds offer better growth opportunities.
Regular Monitoring and Rebalancing
Annual Review

Evaluate your portfolio performance yearly.
Ensure it aligns with your target and market conditions.
Rebalancing When Needed

Adjust allocations to maintain a balance between equity and debt.
Increase debt allocation as you approach your goal.
Emergency Fund and Insurance
Build an Emergency Fund
Safeguard Investments
Set aside 6-12 months of expenses in a liquid fund.
This prevents disruptions to your investment plan during emergencies.
Adequate Insurance Coverage
Protect Your Family’s Future
Ensure you have a term insurance plan covering at least 10 times your annual income.
Health insurance is equally important to cover medical emergencies.
Avoid Common Mistakes
Do Not Overlook Inflation

Plan for inflation-adjusted income.
Increase savings or returns to counter rising costs.
Avoid Direct Funds

Direct funds lack personalised guidance from a Certified Financial Planner.
Investing through a planner ensures better fund selection and performance monitoring.
Stay Consistent

Avoid pausing or stopping SIPs due to market volatility.
Consistency in investing helps achieve long-term goals.
Do Not Time the Market

Focus on disciplined investing rather than predicting market highs and lows.
Final Insights
Generating Rs. 50,000 passive income in 5 years is achievable with focused savings and investments. Increase your SIP contributions, diversify your portfolio, and ensure tax-efficient withdrawals using SWP. Regularly monitor your progress and adjust the strategy as needed. This disciplined approach will help you achieve your goal comfortably.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.