Hi

Many of us especially the retired, seek, regular income from the savings one has accumulated over the years of hard work. Even if not retired, but working or earning decent income, it is always a regular cash flow which keeps your kitty growing and also increasing your confidence levels

One of the known and easy ways of doing this is to invest in a Fixed deposit and opt for monthly payout of interest. The problem with this is that

a. The interest received is taxable

b. In a reducing investment cycle, the cash flow reduces on reinvestment as the interests earned keep coming down

c. There is a lag in case the interest rate picks up, as the benefit of this also delayed.

d. While there is safety of the investments, the invested amount does not grow.

There are options for other investments which can give not only regular cash flows, the cash flows can be tax efficient and can appreciate also marginally

I have considered three options for investments, which when invested can provide the three above mentioned objectives.

1. Investing in MIP mutual funds, which invest 70 to 80% in debt and balance in equity. The equity portion gives appreciation to the capital.

2. Investing in Balanced funds which invest 65% in equity and 35% in debt and these are volatile in the short term but will help give cash flow and appreciation of capital in the long run.

3. Mixing 50% in option 1 and 2 mentioned can also be considered.

The enclosed excel sheet gives the details of working and the summary is given below.

Assumptions while calculating the cash flow.

a. An investment amount of Rs 10 lakhs is assumed.

A ten year time frame has been assumed from the date of investment on 1st April 2007 till October 1, 2016.

b. The year has been chosen as 2007 as there was big market crash in 2008 and hence it would affect the investments, unlike FD.

c. The reason for choosing this that, we may encounter similar situations in future also.

d. For academic exercise, have chosen, Birla MIP wealth Fund and Birla Balanced 95 fund. However a combination of other funds can also be used for investing. This is for understanding the concept.

e. A cash flow of 1 % per month ie 10 k per month and 2% ie 20 k per month are worked out. A person desirous of having higher cash flows can understand that.

f. In order to have a best utilisation and tax efficiency of the cash flows, it is assumed that the first cash flow will start after completion of 3 years,

g. Income tax rates and indexation benefits are assumed as per current IT rules and similarly long term capital gains on equities are as of today. These are subject to change.

h. The interest rate on FD has been reducing over the years. The rates have been assumed as below

first three year 13.2%

Next three years till 2013 as 11.6% and after 2013

it is assumed as 9%

At the current rates, it would be around 8.1% per annum.

i. This is just a concept and illustration and one should understand their risk profile and risk capacity before arriving at any decisions.

j. Investing in balanced fund the entire corpus gives you good returns over the long term. But one can consider a combination of MIP and balanced.

k. You can do contact me for any clarification on this subject.

Thanks

Varadharajan VS

ckar.vsv@gmail.com

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