When you have worked hard all your life- you’ll want to make sure that you can enjoy your retirement.
Stable cash flow month after month is essential for a financial sound retirement.
The most common way individuals currently planning for regular income
1. Rental Income – during working years individual accumulate real estate property which can yield a rental Income. The advantage of rental income is its renewable yearly to hedge inflation.
Real estate property is subject to maintenance risk and non occupancy ; but the major disadvantage of rental income is its taxable.
The rental yield currently across most part of the India is 3-4% , means an investment of Rs 1 crore might fetch a rental income of Rs 3-4 lac per year. Considering an average tax rate of 20% (based on tax slab), property management & maintenance expenses, check out is your real estate is really an cash flow generating asset?
2. Bank FD – Bank FD are by far the most widely used instrument used to generate a regular income. Assume Mr X would like to generate a monthly income of Rs 1 lac; at current interest rate of 7% ; you would need to have Rs 1.71 crore.
Wait we forgot the tax , if you are generating annual income of Rs 12 lac (you will in 30% tax bracket). Assuming a tax rate of 20%, you need to generate a monthly income of Rs 1.2 lac (so that you can pay Rs 20,000 to tax authority & you get to keep Rs 1 lac), for which your retirement corpus will shoot up to Rs 2.05 Crore. So approximately you end up paying an annual tax of 2.4 lac
An NRI enjoy taxation benefit ; but the day the status become Resident, all the NRI deposits have to be replaced to local deposit and the above calculations would be applicable for NRI.
Mutual fund offers wide variety of investment products with different risk/return combinations and are more tax efficient. Systematic withdrawal plan can be used to effectively generate the regular cash flow from the selected investment product.
1. Risk Averse Investor- Choose Monthly Income plan ("MIP") – MIP is a debt oriented hybrid fund with approximately 80% investment in bond & 20% investment in Equity. Has potential to generate a return of 8-10% and Long term capital gain tax accounts for 10% (or 20% post indexation)
2. Moderate risk Investor- Choose Balanced Funds—Balanced fund is an equity oriented hybrid fund with approximately 65% investment in Equity & 35% investment in Bond. Has potential to generate a return of 10-12% and Long term capital gain tax is zero
3. Risk Takers- Choose Diversified Equity Funds—Diversified Equity portfolio a mix of Large, mid, small cap funds . Has potential to generate a return of 12-15% and Long term capital gain tax is zero
Mutual Fund
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Asset Class
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Real Estate
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Bank FD
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Risk Averse
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Moderate Risk
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Risk Takers
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Asset Portfolio
|
Rental Properties
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Bank FD
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MIP
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Balanced
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Diversified Equity
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Long term Expected Return
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4%
|
7%
|
9%
|
11%
|
13%
|
Annual Cash flow (After Tax)
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1,200,000
|
1,200,000
|
1,200,000
|
1,200,000
|
1,200,000
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Applicable Tax
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Taxable Income
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Taxable Income
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Capital Gain
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Capital Gain
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Capital Gain
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Tax Rate
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20%
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20%
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10%
|
0%
|
0%
|
Annual Cash Flow (Before Tax)
|
1,440,000
|
1,440,000
|
1,210,800
|
1,200,000
|
1,200,000
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Retirement Corpus required (Cr)
|
3.60
|
2.06
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1.345
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1.091
|
0.923
|
Conclusion
Mutual fund offers wide variety of schemes in terms bond, equity, gold. It caters to all kind of investor be it risk averse or risk takers. Mutual funds offer better returns, liquidity, transparency and are tax efficient
Mutual fund Systematic Withdrawal Plan is an excellent tool for creating a regular income. The table above is an indication that a risk averse investor through MIP need 1.34 Cr Vs a Bank FD of 2.05 Cr for a generating a monthly cash flow of Rs 1 Lac.
Investment risk is all about volatility of return; you will be better equipped to manage volatility during working years, when you stable income coming in the form of salary; if you don't make your money work for you during your working years; you will never be able to make it work.
Feel free to get in touch with me ( 65708812 / merafundadvisors@
