How can you ensure a regular income from mutual funds?

Arjun had saved for his retirement by investing in FDs and balanced funds for 20 years. He bought adequate insurance and had an emergency fund. Just before retiring, he switched to the dividend option of his MF investments as he wanted to earn a regular income from interest on deposits and the dividends. However, the markets fell soon after and his balanced funds did not pay any dividend. The interest income proved to be too meagre. Arjun was forced to redeem some investments to meet his expenses. He now wants to put his entire corpus into fixed deposits. Is there any other way he can generate a definite income?

Having an all-fixed income portfolio is not advisable for Arjun. The fixed deposit interest will be sufficient only for another three to four years, owing to inflation. A balanced fund, on the other hand, would allow his portfolio to grow at a faster clip than inflation, while ensuring that he earns an assured return from the debt component even in a bear market.

Arjun can earn a regular income from his mutual fund investments by using a systematic withdrawal plan (SWP). He can instruct the mutual fund to redeem units amounting to a certain sum at a fixed date and credit it to his bank account. If he needs Rs 40,000 a month from his mutual fund portfolio worth Rs 30 lakh, with an expected average return of 10% per annum, his corpus will last him nine and a half years. Since an SWP simply allows the redemption of units from the scheme, the tax treatment of each withdrawal will be the same as as that of a full withdrawal of equity, that is, it will be tax free.

The advantage that SWP provides over relying on mutual fund dividends for regular income, is that it provides the assurance of a fixed income at a pre-determined date. Neither the quantum nor the frequency of mutual fund dividends is guaranteed. It relies on market movements and the profits the fund makes. Hence, if Arjun is to depend on mutual funds for meeting his routine expenses, SWP is the way to go.

(Content is courtesy Centre for Investment Education and Learning ( CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)