Pension booster: Get monthly income from mutual fund | The Financial Express

Pension booster: Get monthly income from mutual fund

These hybrid funds are ideal for retirees who want exposure to equity

Pension booster: Get monthly income from mutual fund
Returns generated from these funds are better than bank fixed deposits and even post-office monthly income scheme.

Risk-averse investors looking for a regular source of income can opt for monthly income plans (MIP) of mutual funds. These open-ended funds are debt-oriented and provide dividends. Returns generated from these funds are better than bank fixed deposits and even post-office monthly income scheme.

These hybrid funds are ideal for pensioners or those about to retire who want to have some exposure to equity markets but are not willing to take high risk. Investors can park their savings in these funds as per their cash flow needs and even young investors can opt for the scheme to have limited exposure to the equity markets.

Also Read: Mutual funds: Make the most of volatility with SIP

Harshad Chetanwala, co-founder, MyWealthGrowth.com, says monthly plans or the monthly dividend option can work well for those who need money on a regular basis to take care of their expenses or any commitments. “Such expenses are more planned in nature. Many investors these days also prefer Systematic Withdrawal Plan to take care of their planned needs as they can have better control over their investment and withdrawal,” he says.

How do they work
These funds, also known as conservative hybrid funds, have higher allocation in debt and some allocation in equity — around 75% to 90% of assets in debt instruments and rest (10% to 25%) in equities — to generate additional returns on the overall portfolio. This is to ensure that a higher volatile market does not have a huge impact on the portfolio and returns.

Fund managers take moderate risks in investments and invest some of the pooled money in large-cap, mid-cap, small-cap or micro-cap) companies and the most in debt securities such as debentures, public securities, and corporate bonds. Most of these funds offer complete liquidity and work just like other diversified funds. There is no limit on the investment for MIPs and there is no lock-in period either.

Dhaval Kapadia, director, Investment Advisory, Morningstar Investment Adviser (India), says conservative hybrid funds offer a monthly dividend option to investors (typically retirees) seeking monthly cash flows to meet their day-to-day expenses. “However, investors should note that typically the income is distributed from any distributable surplus that the fund has generated,” he says.

Returns are not guaranteed
As these funds have some equity exposure, returns generated can be higher than that of pure debt funds. The dividend payouts depend on the performance of the fund and are not guaranteed. Investors must note that the returns from these funds are subject to market risk as the valuations for the underlying investments in these funds are market-linked, and hence are not guaranteed like a bank fixed deposit or a post-office monthly income scheme.

Experts say it is better for investors to opt for the growth option and set up a Systematic Withdrawal Plan based on the need. This gives more flexibility as the payouts are as per the investor’s needs and not the kind of dividend the funds declare at every month end. This can also work where the payouts are needed for some time and then restarted later.

Tax structure
The assets allocation between equity and debt plays a key role in determining the taxability of a fund. Like interest proceeds from FDs and post-office income schemes, dividends from conservative hybrid funds (like all other mutual funds) are taxed in the hands of investors at the marginal tax rate. On the other hand, capital gains in the case of holding period of more than three years are taxed (compared to fixed deposits and post-office deposits) at 20% post indexation of costs, which particularly benefits investors in higher tax brackets.

Income plans
Monthly plans or the monthly dividend option can work well for those who need money on a regular basis to take care of their expenses
Conservative hybrid funds have 75-90% allocation in debt and remainder in equity so that a volatile market does not have a huge impact on the returns
Dividends from conservative hybrid funds are taxed in the hands of investors at the marginal tax rate

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 10-10-2022 at 12:15:00 am
Photos
1 Photos
Jawans perform Republic Day rehearsals in high spirit at Kartavya Path amid Delhi cold wave – See PHOTOS
5 Photos
Festive Fervour: Manali Winter Carnival is full of cultural extravaganza – See Beautiful PHOTOS
12 Photos
Redmi Note 12 Pro Plus: Top 12 things to know about Xiaomi’s new 200MP camera phone