While one may be earning well today, the future income too needs to be proactively apportioned and managed from the current income. An individual has to factor this right from the day he starts his career. However, if you have missed the bus, it is never too late to start the moment you realise this truth. Process of constant cash flow When it comes to investing for constant cash flow, it is not what the product name is about but about your needs and requirements. Most of the times, a simple framework can more than serve the constant cash flow purpose at a much efficient price. A product with the name ‘Pension plan’, ‘Child education plan’ may be suboptimal in terms of suitability and returns in the longer run. And there is no one single method which can be said to be the right one. It is horses for courses. In a product-centric approach, as in a child plan, pension plan, money back plan, the investor invests in a disciplined manner over a period of time for a specific duration and then based on the product feature, a stream of corpus is received at pre-defined intervals. This does give comfort that a stream of income is set and will be received. But then it could happen that the stream of income received is not sufficient to meet the cash flow needs of the future.
Rising inflation or increased needs could be one of the many reasons. Fixed income not optimal For constant cash flow, typically fixed income instruments are more in vogue. Bank fixed deposits were the preferred choice, but with reduced interest rates and rising inflation, the returns are going south and not keeping pace with the cost of living. Similarly, small savings schemes like post office monthly income scheme, senior citizen savings schemes are still a part of the investment portfolio. Again, reducing interest rates are a dampener here. Bucket approach In such a scenario, one can adopt the bucket approach. Consider having three buckets. First one for liquidity with a time horizon of 0-5 years, second with a 6-15 year horizon and the third one for over 15 years. Investing in liquid funds, debt mutual funds, bank fixed deposits, government schemes —all of which will generate constant cash flow at defined intervals—can form part of the first bucket. In the second bucket, investing in longer duration tax free bonds and/or perpetual bonds along with investments in balanced mutual funds can be the approach.
The tax free bonds and perpetual bonds have a time frame of 5-10 years and coupled with balanced funds investments can generate a real return beating inflation. In equity investing, 10-15 years is a good time for compounded return. And this is the asset class which should be considered for the third bucket. With passage of time, the investments from third bucket will flow into the second bucket and from the second to the first based on your needs. The bucket strategy uses the product in a optimum manner with asset class being the framework. It has an inbuilt time horizon, liquidity and growth aspect, generating constant cash flow by its very design. Moreover, one can create one’s own customised bucket strategy. There is no right approach. What is more important is that you have a process and framework which you can relate to and believe in. In the investing journey it is important to have a process and give time to the process and framework. Creating a constant cash flow is achievable through bucket strategy, which is easy to use and implement.
The author is managing partner, BellWether Advisors LLP