Regular Retirement Income: Best Way To Achieve

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
Asset Class	Real Estate	Bank FD	Risk Averse	Moderate Risk	Risk Takers
Asset Portfolio	Rental Properties	Bank FD	MIP	Balanced	Diversified Equity
Long term Expected Return	4%	7%	9%	11%	13%
Annual Cash flow (After Tax)	1,200,000	1,200,000	1,200,000	1,200,000	1,200,000
Applicable Tax	Taxable Income	Taxable Income	Capital Gain	Capital Gain	Capital Gain
Tax Rate	20%	20%	10%	0%	0%
Annual Cash Flow (Before Tax)	1,440,000	1,440,000	1,210,800	1,200,000	1,200,000
Retirement Corpus required (Cr)	3.60	2.06	1.345	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@gmail.com) for an professional investment advise.  

Balanced Mutual Fund: An overview

Mutual funds are traditionally classified by the investment asset class they own. Mutual funds which own only stocks (Equity) are called Equity mutual fund. Mutual funds which own only bonds are called bond fund. Mutual funds which own both bonds and stocks are called hybrid fund.

Balanced Mutual fund is a hybrid Mutual fund which invests in both equity and bond. Typical Balanced fund invests 65% in stocks and 35% in bond.

Benefits of investing in Balanced Fund:

•     Balanced fund provides twin benefit of growth (from equity component) and stability (from debt component)
•   Balanced fund offers automatic re balancing- Assume equity is growing faster than the bond then weight of equity crosses 65%(prescribed limit); then fund manager would book profit from equity and invest the same in bond
•  Balanced fund offers lower volatility compared to an equity funds
•  Balance fund offers better liquidity and more tax efficient than the bond funds

Potential return and tax effect:

•  Balanced fund over last 5 years have generated a CAGR return of 15-16%; the realistic long term expectation going forward could be close to 12%.
•  Balanced fund are treated as equity fund from tax perspective. Short term capital gain tax of 15% is applicable if redeemed (withdrawn) within 1 year and long term capital gain tax of 0% is applicable  if redeemed (withdrawn) after 1 year

Potential risk

• Balanced fund invests 65% in equities which is subjected to market volatility and hence the fund return would be more volatile compared to a bond fund/bank FD

Conclusion: Balanced fund offers automatic re balancing which allows your investment portfolio to be more balanced in different market conditions.  Balance fund offers good return, provides diversification benefit, offers flexibility and are tax efficient (long term capital gain is zero percent).Balanced fund comes handy in portfolio building and is a good option for first time equity investors.

For any investment related queries/advise feel free to get in touch with me; you can reach me on 0965-65708812/91-9500151529

Retirement Planning: Balanced Fund Vs Fixed Deposit

Everyone would like to retire financially sound. However majority of the investors would build corpus for retirement over their working years by investing in fixed deposit instruments. FD return most of the times just cover inflation and thus real return (adjusted for inflation) in FD would be 0-2% and returns are taxable.

I advocate balanced funds offered by Mutual Fund Houses for retirement planning. Balanced funds invest in a mix of Equity (generally 60-70%) and bond (generally 30-40%). Equity investments aim at generating capital appreciation, while Bond investments provide capital protection and reduce fund volatility/risk.

Selected Balanced Fund Vs Fixed Deposit (Since Inception)

If an investor had invested Rs 1 lac in BSL Balanced 95 Fund in the year 1995 (at the time fund launch), his worth today would be close to Rs 56.5 Lac when compared to FD worth of Rs 5.03 Lacs; thus investment in BSL Balanced 95 fund would have made you rich by Rs 51.46 Lacs. All the selected funds have generated higher return than the FD in the long run

Selected Balanced Fund Vs Fixed Deposit (Last 5 Years)

If an investor had invested Rs 1 lac in BSL Balanced 95 Fund five years back his worth today would be close to Rs 2.15 Lac when compared to FD worth of Rs 1.46 Lacs; thus investment in BSL Balanced 95 fund would have made you rich by Rs 68,590. All the selected funds have generated higher return than the FD over last five years

Conclusion: Balanced fund with the mix of equity and bond can offer the best from both the asset class. Capital appreciation from equity & reduced risk from Bond. Selected Balanced funds clearly outperformed FD both in the short (over 5 year period) as well as long run (since Inception/fund launch)

Investor’s ability to take risk would be high when they have active income (Employed), higher income levels, longer investment horizon (still has sufficient time for retirement/essential commitment); If your current situation provides you enough flexibility to take risk then you should seriously consider putting your money work for you by investing in Balanced fund instead of FD. Plan well for happy & financially sound retirement

Feel free to place your comment and for any queries related to personal finance, you can reach me @ smartportfolioadvisors@gmail.com.