We have heard about the long term investors, short term investors, speculators, and punters. We have seen the hustle-bustle of stock market, green and red lines on charts, and universal fight of bulls and bears. We have seen our fortunes going up and down with stock market.
Beyond all these hustles and bustles, there is a set of investors who want to invest in assets that provide monthly cash flow to meet their expenses. They do not look for multi bagger or even high growth but a decent monthly income out of their investment. This article is aimed at people who look for monthly income from their investment. Even if you do not need it now, keep reading. You will need this when you grow older.
What is monthly income plan?
Monthly income plans are investment instruments that provide monthly return on your investment. Individuals have to invest a certain amount of money in such instruments and get pre-defined monthly income or income based on market situation.
Since these plans have to deliver monthly returns, they invest a significant part of their assets in safe instrument such as Government and corporate bonds. Based on the plan and their portfolio allocation, the returns vary between 6% - 12% on average.
How to invest in monthly investment plan
There are enough investment instruments in the market that provide monthly income. Banks, Governments, and even stock market give you enough options and combination of risks and returns to choose from.
Individuals can invest in monthly investment plan through the following:
Government Schemes
Government backed schemes such as post office monthly income plan is very popular among investors. This plan is well suited for investors who cannot take too much risk with their money. By the virtue of being Government backed, they are risk free investment.
The interest rate is 8% and the maturity period is 6 years. This means you have to stay invested for 6 years. If you break it before 6 years, a penalty will be imposed. The penalty is 2% if you break it before 3 years and 1% if you do it after 3 years and before 6 years.
The plan also pays you 5% bonus at the end of the tenure. Taking the bonus into account, your effective return becomes 8.84% annually. This is a pretty good return from a safe investment asset.
For single account, the minimum investment required is Rs 1,500 per year. The maximum limit is 4.5 lakhs. You can also open a joint account with the maximum limit of 9 lakhs per annum. You have to invest the money once and get your income every month. If you invest 4.5 lakhs in this scheme, your monthly income will be Rs 3,000. The investment can be used for tax deduction under section 80C within the limit of 1 lakh.
You can visit any of the post offices and start a monthly income scheme. If the specific post office has no facility, they can direct you to the ones that have it.
Banks’ Schemes
Banks keep coming up with monthly income schemes. To cite an example, Bank of Baroda offers a monthly income plan. The investment can be any amount greater than Rs 1,000. The maturity period can be anything up to 20 years.
This is also pretty safe investment as banks rarely go bankrupt, especially large banks. The returns can be anywhere between 6% and 9%. The returns depend on interest rate and hence fluctuation in interest rate can give rise to fluctuation in returns too. Union bank of India has come up with another monthly income plan. Investors should keep an eye on the plans offered by different banks.
Funds Schemes
There are mutual funds that provide monthly income plan to investors. Mutual funds are riskier than banks’ schemes and post office schemes because they invest a part of your investment in equity.
They are conservative in nature and major portion of investment goes towards Government and corporate bonds. This is to ensure that investors are not exposed to high risk of equity investment. These funds do not have a fixed rate of return but they pay dividends. The amount keeps changing based on market situation.
Usually the returns are 10%-15% depending on market situation and portfolio. The advantage is certainly the high returns but the disadvantage is the exposure to market. There are situations where monthly income plan funds did not pay the investors for many months in a row.
Some of the best monthly income plans, based on their returns, are Birla asset allocation conservative, DSPML savings plus aggressive, magnum monthly income plan for SBI, and HDFC MIP long term.
Finally…
Monthly income plan is a good alternative to supplement your monthly income from other sources. These plans add stability to your portfolio because of their conservative nature. For additional investment news and ideas, follow the Fisher Investments blog.
The author Pankaj Priyadarshi is a financial consultant and can be reached at pankaj@verticalgrass.com. He is B.Tech from IIT, Kharagpur and MBA from ISB, Hyderabad.
Investment Calculator