The question “How to generate regular income” is no longer a question among retirees; even many youngsters are also looking for ways to set up a passive source of income. Some ask due to unsecured job environment and some ask as they have plans to leave job in few years’ time and want to start something on their own. In both the cases the major reason for the regular income is to support the family expenses during the uncertain phase.
In this post I will discuss few products which can used by investors to supplement or generate the regular monthly/quarterly income.
First thing first, there’s no substitute for financial planning. In this case also, the basics of financial planning has to be worked upon like keeping adequate emergency fund, having adequate insurance coverage and also a financial discipline in savings and spending. You need to have clear cut idea on what you want to achieve as monthly regular income. Well, this figure will come out from the monthly important expense structure of your family. Also be sure that every product has its own limitation and to counter that you need to have more savings in hand.
Very simple Maths- More you put in, more you get.
Below are some of the products which can be used to generate regular income. Here I will cover only those schemes which generate monthly or quarterly income. Annual income products are out of purview of this article.
6 Products that generate regular income
1. Post Office MIS:
This product as available with Post offices in India has an investment limit of Rs 4.5 lakh in single holding and Rs 9 lakh in joint holding. The interest rate varies each year depending on the government securities rate, but once invested the rate will remain same for the complete tenure. The maximum tenure for which one can invest is 5 years. Current rate of interest is 8.4%. You will get Monthly interest payouts and interest credited in your bank a/c directly.
This is a Guaranteed return instrument. Interest is taxable
2. Immediate Annuity products of Life Insurance companies
Annuity is synonymous to Pension. Annuity means a fixed sum of money paid at regular intervals. Generally immediate annuity products are used to supplement the pension income during retirement years and now days there is even a condition of buying these products once your pension plans gets matured. (Read: How pension plans in India works)
But this immediate annuity product can be used by anyone. The pension/annuity or regular income amount depends on the amount you have invested, payout option (monthly/quarterly/Annually) you have selected and annuity option opted for. These products come under traditional/endowment insurance category and once fixed, annuity will never get changed, unless the product provides flexibility of changing the annuity options in the mid of the term. The different annuity options as offered by HDFC Immediate annuity plan is as below
This is a Guaranteed return instrument. Annuity is taxable
3. Bank/Corporate Fixed deposits with monthly/Quarterly interest payout.
Bank fixed deposits are regular products used by almost everyone. These deposits can be taken in cumulative or interest payout options. Interest payout can be taken in monthly or quarterly intervals. Same ways there are some corporate fixed deposits launched by some corporate houses. Some are rated and some are not. As these products are risky as compared to bank fixed deposits so the interest rates are more than bank FDs.
This is a Guaranteed return instrument with some credit risk. Interest payments are taxable
4. Senior citizen savings scheme
This product is available only for Senior citizens i.e the investor should be of age 60 years or higher. Even a person who’s crossed 55 years of age and has taken VRS can invest in this product to generate regular income. The maximum deposit one can make is of Rs 15 lakh in single or joint holding. The rate of interest like PO MIS is linked to the G sec rates and keeps on varying each year. But once invested the rate will remain same for the complete tenure. Tenure of this product is 5 years which can be extended for 3 more years. And the current rate of Interest is 9.20% with quarterly interest payable.
This is a Guaranteed return instrument. Interest is taxable
5. Reverse Mortgage
This product is also available only to Senior citizens to generate regular income. This is meant for those people who don’t have much liquid savings available with them and have only a house in their name. In this product the owner of the house who should be a senior citizen mortgage the house with a bank in return for monthly or lump sum payment. The best part in reverse mortgage is that senior citizens can stay in the same house till end and they don’t have to repay anything to the bank. After their demise the legal heirs will be asked to repay the loan else bank will sell the house and return back the excess to the legal heirs after deducting the loan and interest amount.
This product is not so popular product as of now. But looking at the people’s passion for real estate and also compromising retirement savings for their children or liking towards paying EMI instead of monthly savings, this reverse mortgage product is going to be hugely popular in times ahead.
6. Mutual funds MIP (with or without SWP)
These products are among Hybrid debt oriented category of mutual funds. The investment objective of such product is to generate monthly income for investor, though these are not guaranteed. There are 2 ways to get monthly regular income from these products. One is through Dividend payouts and other is through Systematic withdrawal plans (SWP). The main difference between these 2 choices is the certainty of payouts and taxation. Unlike all the products mentioned above except reverse mortgage Mutual funds with SWP is the most tax efficient option. (Read more about how monthly income plans works with SWP)
Some may say that real estate rentals can also be another source of regular income, but I think that when the requirement is of regular income then due to poor rental yields real estate is not the suitable option. It may get you good capital gains but you should not expect good rental yield (rent as a percentage of property value) out of it. Moreover this kind of option is not affordable for everyone. (Read : 10 reasons why real estate is riskier than equity)
As I quoted at start regular income needs varies from person to person. Some requires it to supplement the retirement income, for some this is going to be the only source of income and some people just look out for another passive income product. Before selecting any of the products, be sure about the impact of taxation and inflation on your returns and select accordingly.
Do you know any other product which can help in generating regular income (monthly/quarterly)? Share your views.