I have 1 crore & i would like to invest in mutual funds. I want good returns out of it which will allow me to draw monthly income through it. Please suggest where/what to invest in ?
Thank you.
Ans: Before diving into specific options, it’s important to assess your goals. You have Rs. 1 crore to invest, and you're looking to generate a monthly income from it. Mutual funds can indeed provide that, but it's essential to balance growth with safety. With a well-planned approach, you can aim for consistent returns.
The right mix of equity and debt mutual funds can help you achieve regular income while ensuring your capital grows over time. Let's break down the key factors to consider.
Investment Horizon and Risk Appetite
To generate regular monthly income, the choice of funds will depend on how long you're willing to keep your money invested and your comfort level with risk. Since you’re looking for monthly income, stability and capital protection will be important.
Here are the key points to focus on:
Long-Term Growth Potential: You may want a part of your funds in equity mutual funds for capital appreciation. Equities have the potential to deliver higher returns over a long period.
Steady Monthly Income: For monthly income, debt funds or hybrid funds may offer more stable returns. They come with lower risk compared to pure equity investments.
Risk Management: It’s crucial to diversify across asset classes. This spreads out the risk and reduces the impact of market volatility.
Types of Mutual Funds to Consider
Based on your need for a balance of regular income and potential for growth, here are some categories of mutual funds you can consider:
1. Hybrid Funds
Hybrid funds invest in both equities and debt instruments, offering a mix of growth and stability. These funds provide the advantage of equity exposure for long-term appreciation while reducing risk through debt instruments.
Benefits: They help balance risk and reward. Equity ensures growth, while debt provides stability.
Why It Works: If you want some growth but are also concerned about regular payouts, this can be a good option.
2. Monthly Income Plans (MIPs)
Monthly Income Plans are debt-oriented hybrid mutual funds. They invest primarily in debt instruments like bonds, but also allocate a small portion to equities. This gives you some exposure to the stock market, while the debt portion ensures regular income.
Benefits: These funds focus on generating regular income, making them suitable for investors looking for steady cash flow.
Why It Works: These plans are perfect for conservative investors who want monthly income with a little equity exposure for growth.
3. Debt Mutual Funds
Debt mutual funds are a safe option for generating regular income. They invest in government securities, corporate bonds, and other debt instruments. These funds tend to be less volatile than equity funds.
Benefits: They provide regular income and are relatively safe compared to equity funds.
Why It Works: If your priority is capital protection and regular income, debt funds should make up a significant portion of your portfolio.
4. Systematic Withdrawal Plan (SWP)
Once you've selected your mutual fund portfolio, you can use a Systematic Withdrawal Plan (SWP) to draw a regular monthly income. This allows you to withdraw a fixed amount at regular intervals, ensuring you get the cash flow you need.
Benefits: An SWP ensures you receive regular payouts without compromising on potential returns.
Why It Works: You maintain the investment’s growth potential while drawing income as needed.
How Much to Allocate to Each Fund?
Since your goal is to have both growth and income, you should consider splitting your Rs. 1 crore across different types of funds:
Equity Funds: Around 40% of your corpus should be in equity mutual funds to ensure your money grows over time. These funds may experience some volatility in the short term, but over the long term, they offer the best potential for growth.
Debt and Hybrid Funds: Around 60% should be in debt and hybrid funds. This portion of your investment will offer more stability and provide regular income.
SWP for Monthly Income: Set up a Systematic Withdrawal Plan (SWP) from your debt or hybrid fund investments. You can withdraw a fixed sum every month, ensuring a stable monthly income.
The Role of a Certified Financial Planner (CFP)
It’s always beneficial to work with a Certified Financial Planner (CFP) when designing such a portfolio. They can help:
Assess Your Risk Tolerance: It's crucial to match your investments to your risk tolerance.
Monitor Your Investments: The markets change, and so should your portfolio. A CFP will help you review and rebalance your investments as needed.
Tax Efficiency: A CFP can also help you understand the tax implications of your investments and withdrawals. SWP withdrawals are more tax-efficient compared to dividend payouts from mutual funds.
Disadvantages of Direct Funds
You might have considered direct mutual fund plans. While they do offer lower expense ratios, they lack the personalized guidance of a Certified Financial Planner (CFP). Many investors opt for direct plans but end up making emotional decisions during market volatility.
Higher Risk of Mistakes: Without professional guidance, investors might redeem funds at the wrong time or choose schemes that don't align with their goals.
Why Regular Plans Are Better: With regular plans, you invest through a Certified Financial Planner who helps you stay on track, avoid mistakes, and choose the right funds for your goals.
Actively Managed Funds Over Index Funds
While index funds might sound like a low-cost, easy option, they come with several drawbacks:
Limited Flexibility: Index funds follow the market. They cannot outperform or protect your capital during market downturns.
Better Alternatives: Actively managed funds have the potential to outperform index funds. Fund managers make decisions based on market conditions, helping maximize returns while managing risk.
Why Active Management Matters: Fund managers in actively managed funds can adjust the portfolio according to market trends, offering better protection against market volatility.
Final Insights
Your Rs. 1 crore can be invested wisely in mutual funds to generate both monthly income and long-term growth. By diversifying across equity, debt, and hybrid funds, and using a Systematic Withdrawal Plan (SWP), you can enjoy steady income without depleting your corpus.
Hybrid and Debt Funds: These offer the balance of regular income and safety.
Equity Funds: These ensure long-term capital appreciation to combat inflation.
Systematic Withdrawal Plan: This allows you to withdraw monthly income while keeping your investments intact.
Working with a Certified Financial Planner ensures that your investments are tailored to your needs, regularly reviewed, and tax-efficient. They provide the guidance and expertise needed to maximize returns while ensuring your goals are met.
By following this approach, you can enjoy financial security while benefiting from the potential growth of your investments.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
