THE CASE:
I want to invest Rs. 30 lakhs for a year and would need a monthly income of Rs. 18,000 from this investment. How should I go about it?
THE SOLUTION:
Firstly, the advice in such situations would be to resist from acting in a hurry, because that leads to commit mistakes.
The returns requirement is roughly about 7.2% p.a.
If you are having a debt costing anything above that, I would have advised you to pay it off in the first instance. On the other hand, if you had no emergency fund, I would have suggested to create one. Since, there are no other inputs about your overall financial situation and your risk profile, my suggestions will be based on;
- Investment period: 1 year.
- Purpose: Since you want to invest it for drawing a monthly income, I have looked at capital safety as the primary need, not growth.
Given the time frame, the current economic scenario and high volatility in the equity market, it is advisable to avoid any exposure to equities that may cause downside risk to your portfolio. Equity investors should not have a short-term horizon because the volatility can disfigure a portfolio. Even conservative hybrid funds typically have about 20% – 25% exposure to equities.
I would suggest investing the entire amount into fixed-income instruments.
With the excess liquidity in the banking system, and rate cuts by the RBI, the interest rates on fixed-income instruments have fallen over the last year and half. Therefore, yields on fixed-income mutual funds too have come off (around 5 – 6% for shorter duration categories).
Since you have specifically mentioned the monthly withdrawal requirement, you can consider parking the corpus into shorter duration accrual fixed income funds with a high credit quality portfolio.
You can look at the analysis of certain funds to help you arrive at a decision. You can also view fund performances.
If you are a senior citizen with taxable income, you can consider parking around Rs 9 lakh in bank fixed deposits, interest under which is tax deductible up to Rs 50,000 under section 80 TTB for senior citizens.
Currently, fixed deposits of the leading public sector and private banks offer interest rates in the range of 5.1% – 5.4%, with an additional 50 bps for senior citizens.
Given these low interest rates prevalent, you would be able to withdraw about Rs 15,000 per month, on a pre-tax basis.
However, if you are willing to take a bit of calculated risk, then you can invest about Rs. 8 lakhs of the total amount into Peer to Peer (P2P) lending. P2P platforms come with different risk-reward offerings and investment options within. The returns range can be from 10% to 20% or higher.
Assuming a conservative option with say 12% returns on P2P and 5.5% on fixed income funds, the weighted average return for the above portfolio of Rs. 30 lakhs would be 7.23% p.a that can give a monthly income of Rs. 18,000.
Disclaimer: The above may not be the only solution and there could be multiple solutions for the same case. This is only a case study and should not be construed as any kind of investment advice. Personal and financial situations differ for each individual. Please consult a professional advisor before investing.
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