The basic needs of life cannot be met without a steady source of income. It is therefore essential for every individual, whether salaried or self-employed, to have a good amount of savings that can help them on their rainy days. While the salaried have more or less stable sources of income till the time they retire, the volatility of income in the case of self-employed persons is relatively high. In such cases, having an alternate source of income becomes a blessing.
Below are a few details related to common monthly income plans and the need for such plans.
What is the need for an alternate source of income?
The recent pandemic has had a devastating impact on a vast majority of the population not only in our country but also abroad. Many have lost their livelihood or have lost the sole breadwinner of the family. This has put the financial future of many families in danger. Having an alternate source of income provides the much-needed cushion in such times till the family gets back on its feet.
Apart from such dire situations, having an alternate source of income is beneficial to every individual. It helps them meet their financial goals more comfortably rather than depending on the primary source of income.
Who can invest in monthly income plans?
Monthly income plans are investment plans that provide a regular source of income to the investors. These plans are ideal for investors who are mostly risk-averse and also have short-term financial goals. These plans provide an alternate source of income as well as a certain amount of financial independence which makes it an attractive investment option for many investors.
The portfolio of investors targeting more or less a steady source of income is quite different from those looking for wealth creation. The portfolio in the former case usually reflects more of traditional investments like FDs, government schemes, bonds, or dynamic investment options like debt funds or dividend yield funds. On the contrary, the portfolio of investors looking for wealth creation has more aggressive funds or equity funds.
What are the various options that provide monthly income?
There are multiple investment options that provide the benefit of a regular income. Some of such investment options are detailed below.
1.Post office monthly income scheme (POMIS)
Post Office Monthly Income Scheme (POMIS) is a savings scheme offered by the Post Office in India which is backed by the Central Government. This scheme is available for a fixed tenure of 5 years with a reinvestment option for another 5 years.
The current rate of interest offered under the scheme is 6.6% per annum. The minimum amount to be invested under the scheme is Rs. 1500 and the maximum amount depends on the type of account (whether a minor account/ joint account or single account). Investors can withdraw their investment prior to completion of tenure subject to certain penalties as per the guidelines of schemes. This scheme is ideal for senior citizens who prefer a low-risk investment and a steady source of income.
2.Mutual funds with monthly income plans (MIPs)
Monthly Income Plans (MIPs) are mutual fund schemes where the underlying assets are mostly debt instruments providing fixed and regular income. Investors get more or less a steady source of income through these funds. The returns are not guaranteed as they depend on the fund performance. These plans are usually preferred by risk-averse investors who want to limit their exposure in the mutual fund market as well as earn regular returns.
3.Senior Citizens Savings Scheme (SCSS)
This is a government-backed scheme designed especially for senior citizens above the age of 60. Citizens over the age of 55 years can also avail of this scheme provided they have retired under the voluntary retirement scheme. Investors can invest up to Rs.15,00,000 and get interest on their investment at the rate of 7.4% which is paid quarterly. The tenure for this investment is 5 years. The income received from the investment is taxable in the hands of the investor.
4.Dividend paying stocks
Many investors also invest in individual stocks that have a history of providing regular dividends to the investors. These are usually blue-chip companies that have a sound business model. It is to be noted that the dividend income is now taxable in the hands of the investors at the applicable slab rates.
5.Dividend yield funds
Dividend yield funds are mutual funds that invest primarily in companies that have a track record of providing regular dividend income to the investors. The returns under these funds are not guaranteed or fixed as it depends on the performance of the fund. One of the main advantages of these funds is diversification and lower cost which allows the investors access to different types of asset classes, sectors, and industries at much lower risk as compared to individual investments. It is ideal for new investors or risk-averse investors looking for an alternate source of income through the mutual funds market but wants to limit their exposure at the same time.
6.Life insurance with monthly payout option
Another option for generating a steady source of monthly income is through life insurance plans. Investors can opt for various life insurance plans like term insurance, retirement plans, etc. which have the option of lump sum payout or a staggered payout along with a portion of the lump sum payout. This staggered portion can be in the form of a monthly payout option or quarterly or annually as per the agreement between the policyholder and the insurer. This is another low-risk option that can be easily accessed by any person as an alternate source of income. But be aware that the rates of return on these kinds of schemes are rather low.
7.Bank FDs
Bank FDs are a traditional mode of investment that has been favored by many investors even today. This option can be available through any bank (public or private) and does not require huge funds, to begin with.
Investors can create an FD with an amount as low as Rs. 1,000 – Rs. 5,000 depending on the policy of the bank. This investment in bank FDs can provide interest starting from 2.50% per annum to 8% per annum depending on the bank. Investors also have the option of investing in tax-saving FDs with the minimum lock-in period of 5 years and they can get a deduction of up to Rs. 1,50,000 under section 80C from their taxable income.
However, the interest received from Bank FDs is fully taxable at your slab rate.
8.Systematic Withdrawal Plans (SWPs)
Systematic withdrawal plans are another option to generate more or less a steady income from mutual funds. Investors can withdraw a fixed amount of money from their mutual fund investment at regular intervals under SWP. Investors can choose the amount to be withdrawn and the date of redemption and on the set date, the fixed portion will be redeemed and transferred to the investor’s bank account. The tax on such investments (whether short-term capital gains or long-term capital gains) will be charged based on the period of holding of the units.
9.Rent from investment in Commercial/Residential property
Another traditional mode of earning an alternate source of income is by renting out the additional property that the person has. It can be a residential or commercial property owned by the person. The rent income is taxable in the hands of the owner but the loan taken to buy the property can qualify for tax deduction under various sections of the Income Tax Act, 1961 (Section 80C, Section 24, Section 80EE, section 80EEA)
The rent income, although relatively stable, is still subject to certain risks. Some of the common risks of rental income from commercial and residential properties are mentioned below.
- High volatility due to frequent changes in tenants (especially in the case of residential properties)
- Resale or exiting from the investment can be difficult as real estate is one of the most illiquid assets.
- Additional investment is usually required to make the property appealing to the tenants (especially in the case of residential properties).
- Owners have to ensure that the property is in line with the various prevailing laws related to renting a commercial property.
Conclusion
Every person wishes to have a stable source of income that can meet their financial needs and that of their family. However, in today’s uncertain world it is riskier to depend on a single source of income. Having an alternate source of income can provide much-needed mental peace and a safety net in times of crisis as well as help in meeting the financial goals faster.
FAQs
1. What are some other options that provide regular income?
A. Some other investment options that provide a regular income are government bonds, corporate bonds, Pradhan Mantri Vaya Vandana Yojana (PMVVY), savings account, recurring deposits, ultra short-term bonds, etc.
2. Is investment in dividend-yielding stocks risk-free?
A. No. such investment is not risk-free as the usual risks of an investment in stocks are always present like market risks, volatility risks, liquidity risks, etc.
3. Is investment in Bank FDs safe?
A. Yes, investment in bank FDs is one of the safest investment options as the amount is also insured by the DICGC up to Rs. 5,00,000.
4. How can a person invest in mutual funds?
A. A person can invest in mutual funds directly through the fund house or through a registered broker. Fisdom App is an excellent way to invest in mutual funds easily at zero commission or fees.
5. Is life insurance with a monthly payout option tax-free?
A. Yes. Any payout option to the policyholder their nominee as maturity benefits or death benefits are tax-free as per section 10(10D) of Income Tax Act (provided the premium paid is less than 10% of the sum assured for policies taken after 1st April 2012 and 20% in case of any policy taken prior to 1st April 2012).
