- The systematic withdrawal plan route lets one create a
regular income from mutual fund investments like a pension. - Insurance
annuity plans can create a regular income, but the rate of return is low and does not beat inflation. Rental income can also provide regular income but comes with high upfront costs and uncertainties.
Mutual funds are one of the best options to generate a regular income. Mutual funds offer a lot of flexibility. Through mutual funds you can get into each and every asset class apart from real estate- equity, debt, gold and even government bonds at a very low cost.
“The systematic withdrawal plan (SWP) route works as well as a pension. You invest in a lump sum you set up a date, and that particular date, every month or at whatever frequency you want, the money will be credited to your account just like a pension,” says Suhas Harshe, money coach at MoniYogi Suhas Harshe, a financial planning firm.
Also when you withdraw money from mutual funds, it does not get taxed as income from other sources and gets taxed as capital gains.
If you get an income from a FD or from rental income, it is treated as income from other sources and falls into a 30% tax bracket if you fall in that category.
But in mutual funds SWPs, long term equity funds capital gains enjoy a favourable tax treatment with indexation benefits that you do not get anywhere else.
Investing in dividend-paying stocks can be a way to earn regular income. The benefits of such stocks include the potential for a higher income compared to traditional options like bonds or fixed deposits.
Additionally, there's a chance that the value of these stocks may increase over time, offering the opportunity for capital growth.
However, it's important to keep in mind the drawbacks, such as the uncertainty of stock prices, as they can fluctuate, impacting your income. Companies may also reduce or eliminate dividends in challenging economic conditions.
Insurance annuities can also provide a regular income, especially after retirement. “For a risk averse investor one could explore annuities as an option for regular income,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.
However, annuities have their downsides as well. One notable drawback is their susceptibility to inflation, as fixed annuities might not keep up with rising living costs, eroding the income's real value.
High upfront fees, charges, and early withdrawal penalties can also be burdensome, reducing the initial investment and limiting liquidity for unforeseen financial needs.
Rental income can provide a regular income source but offers both advantages and disadvantages. On the positive side, it provides a steady income stream, often in the form of monthly or quarterly rent payments.
Real estate also has the potential for long-term capital appreciation, serving as a wealth-building strategy alongside rental income. Additionally, it offers the security of owning a tangible asset with less susceptibility to market volatility compared to stocks.
However, there are drawbacks to consider. Acquiring a rental property can incur a high cost “To buy a rental property, the amount that you need to invest upfront is huge. Also once a tenant leaves and a new tenant comes, there is a gap in your income,” says Harshe.
Property management can be time-consuming and costly, including dealing with tenant issues and maintenance. Real estate values can fluctuate, and selling quickly in adverse market conditions can be challenging. Economic factors can also affect rental demand and income potential.
What investment option you choose to generate a regular income would depend on several factors. But one or more options can be considered to generate a regular income, after keeping in mind the pros and the cons.