If i invest 2 lac shall i get monthly income 5000 definitely
Ans: When you want to generate a monthly income of Rs 5,000 from an investment of Rs 2 lakhs, we need to first evaluate the available investment options.
Let's analyse the potential options to achieve this.
SWP from Mutual Funds
A Systematic Withdrawal Plan (SWP) is a popular option for generating monthly income. In SWP, a fixed amount is withdrawn regularly from a mutual fund investment. It provides a disciplined way of receiving income without disturbing the entire capital at once.
However, achieving a consistent monthly withdrawal of Rs 5,000 from an investment of Rs 2 lakh may be challenging, especially in the long term. Here's why:
Expected Returns: Equity-oriented mutual funds may offer returns in the range of 10-12% per annum, while debt-oriented funds typically offer 6-8%. The returns can fluctuate, so a fixed monthly withdrawal amount may reduce your capital over time if returns are lower.
Capital Depletion: If the returns from your mutual fund do not match your withdrawal, your initial investment will gradually deplete. In the case of equity funds, market volatility might also affect the value of your capital.
Investment Horizon: A higher monthly withdrawal, like Rs 5,000 from Rs 2 lakhs, may not be sustainable for long. To sustain this, you may need to consider reinvesting or adjusting your withdrawals.
Monthly Income from Fixed Deposits
Fixed Deposits (FDs) offer a more predictable and stable income, but the interest rates are much lower than mutual funds. Let's assess FDs for generating Rs 5,000 monthly:
Interest Rates: Current FD interest rates range between 6% to 7% per annum. This means an annual income of around Rs 12,000 to Rs 14,000 on an investment of Rs 2 lakhs.
Monthly Income: With these interest rates, the monthly income would be only around Rs 1,000 to Rs 1,200, far less than the Rs 5,000 target.
FDs offer safety but will not meet your income expectations from Rs 2 lakhs.
Exploring Balanced Advantage Funds
Balanced Advantage Funds (BAFs) could be an alternative option. These funds dynamically invest in both equity and debt based on market conditions. This reduces the risk of market fluctuations while offering potential growth.
Potential Returns: These funds may provide returns between 8-10% on average. While safer than pure equity funds, the returns are not guaranteed and may vary.
SWP Potential: Like equity or debt funds, withdrawing Rs 5,000 monthly from Rs 2 lakhs could lead to capital depletion if returns are insufficient.
Challenges with Index Funds and Direct Funds
Index Funds
Index funds track a specific index (like Nifty or Sensex). While they offer low costs, they only provide market returns. These are usually lower than actively managed funds in the long run.
Limited Returns: Index funds cannot outperform the market as they only mirror it. Actively managed funds have the potential to offer higher returns by selecting stocks that outperform the index.
Volatility: In a market downturn, index funds will drop in value just like the index, without any cushion.
Thus, relying on index funds for a fixed monthly income like Rs 5,000 might not be the best option.
Direct Funds
Direct funds eliminate the role of a middleman (like an MFD), and investors handle the management themselves. However, they come with disadvantages:
Lack of Guidance: Without the guidance of a Certified Financial Planner, direct fund investors might make emotional or uninformed decisions. An experienced planner ensures you choose the right mix of funds for your income and risk level.
Complexity: Managing your investments directly requires significant time and effort to understand the markets. For most investors, it's beneficial to invest through a Certified Financial Planner.
Benefits of Actively Managed Funds
Actively managed funds are overseen by professional fund managers who aim to outperform the market. Here's why they are preferable:
Higher Return Potential: With an experienced fund manager, actively managed funds can outperform the market, offering better returns than passive index funds.
Risk Management: Fund managers adjust the portfolio based on market conditions, ensuring risk is balanced. This can protect your capital in volatile times.
Customization: Certified Financial Planners can help you choose funds that align with your financial goals, risk tolerance, and timeline.
Considering Risk and Returns
With Rs 2 lakhs, generating Rs 5,000 monthly requires careful planning. The annual withdrawal rate would be 30%, which is unsustainable over time. Even with a higher-risk strategy, it’s improbable to maintain such a high monthly income without eroding your capital.
Risks of High Withdrawal: Over time, withdrawing Rs 5,000 per month from Rs 2 lakhs will reduce your capital. If your fund performs poorly, the capital will deplete faster.
Adjust Expectations: A more reasonable expectation for a Rs 2 lakh investment would be a monthly income between Rs 1,000 to Rs 1,500, depending on the market returns.
Recommended Approach
To meet your Rs 5,000 monthly income target, here’s a better approach:
Increase Investment: You may need to invest a larger amount (closer to Rs 8-10 lakhs) to generate Rs 5,000 monthly from safe investments.
Consider Hybrid Funds: Invest in balanced or hybrid funds for a mix of equity and debt. These provide better stability while offering the potential for moderate growth.
Reinvest Gains: If possible, reinvest your returns for a few years to grow your corpus, and then start withdrawing once the corpus has grown sufficiently.
Explore Multiple Sources: Instead of relying solely on one investment, consider diversifying. Some in debt funds for safety, and others in equity for growth.
Taxation Considerations
Always consider tax implications when withdrawing income from investments. Here's a brief summary of mutual fund taxation:
Equity Mutual Funds: Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%. Short-term gains (STCG) are taxed at 20%.
Debt Mutual Funds: Gains are taxed as per your income tax slab.
Plan withdrawals to minimize taxes and enhance net returns.
Final Insights
Investing Rs 2 lakhs and expecting Rs 5,000 monthly is not a sustainable approach for long-term income. A more realistic expectation is needed. Consider increasing the investment amount or lowering your monthly withdrawal to preserve capital. Balanced Advantage Funds or actively managed funds can offer a better mix of risk and return.
For tailored advice and a well-diversified investment plan, it’s best to work with a Certified Financial Planner. This ensures your investments are aligned with your financial goals, and that your strategy is sustainable over the long term.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment