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Ramesh Pathania/Mint
Ramesh Pathania/Mint

Choose systematic withdrawal plans for monthly income

It will give you a consistent and regular source of income

I am 72 years old and have a fixed deposit (FD) of 2.5 crore with a public sector bank and another FD as well. Along with this, I am getting 1 lakh a month. Could you tell me about other avenues where I can earn 1 lakh as regular income. I have suffered losses in the past by investing in equity and mutual funds, so I am not very confident about them. Safety is my priority and I am not looking at that long a horizon.

—Anil

Safety and capital protection are the critical aspects for your investments. And a simple way could be (which you are currently following) to continue holding your FDs.

However, you should be aware of the downsides. Your marginal rate of tax is high, so the cost of attaining the safety is quite high. For example, if your deposits are at an interest of 9.5%, the interest (net of taxes) comes to around 6.56% assuming a tax rate of 30.9%. Now, this rate is nowhere close to inflation, i.e., the purchasing power of your money is getting diminished. Hence, it would not be wrong to say that this also equals to a loss. And currently we are not discussing on how secured are the FDs. So, the next level of discussion is: are there any instruments that can provide you a tax-adjusted return which can come close to inflation.

In the past one year, there has hardly been any asset class that has come given returns that are close to the inflation rate, leave aside performance.

So what are the options considering safety as the mainstay of your investments and that we don’t compromise on this. The options become further limited if you also add that the horizon of the investments is not long term. In the debt space, you can consider fixed maturity plans (FMPs) of a horizon of 13-14 months. These closed-end funds are available mostly around February and March of the year and preference should also be given to this time frame, as it offers a good source of tax-adjusted income. FMPs mature on a specified date.

There are other investment options that are open-ended and can be held for longer durations or as the need may be. You can consider short-term funds where the average maturity is of 18-24 months. However, you can hold for even longer periods.

Also, you can plan in such a way that you have FMPs running perpetually and short-term funds at any given point of time.

The monthly income can come via systematic withdrawal plan (SWP) instead of dividends payouts, which can be erratic at times. SWP, besides being more tax efficient, will also give you a consistent and regular source of income.

Lastly, if you are willing, take exposure to equity but limited to 10% of your portfolio. You can do this by choosing mutual funds, mainly large-caps and multi-cap funds. But the horizon needs to be long term.

Queries and views at mintmoney@livemint.com

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