Investing money for monthly income generation is not very popular in India.
Investments are more synonymous with capital appreciation.
As capital appreciation has potential to provide immediate gratification, people follow ‘growth strategy’ more than ‘income strategy’.
But there is a minority who prefer investing for monthly income.
When objective is to become financially independent, knowing how to invest for monthly income becomes prime.
The concept of monthly income generation through investing is simple. “Invest money to accumulate monthly income generating assets”.
Income generating assets are different from assets which assures capital appreciation.
Composition of investment portfolio for income generation is different from capital appreciation based portfolio.
People get too fascinated with capital appreciation. As a result, monthly income generating assets gets ignored.
Assets capable of generating monthly income may not yield high returns. But what these assets can guarantee is stable income.
There is a strong reason behind “income investing” being practiced by all top investors. Income investing can guarantee financial independence.
More income generating assets in portfolio, means higher passive income. High passive income will ultimately lead to financial independence.
How to Start investing for monthly income?
Set A Goal. This is a first step.
What monthly income investments can do best is, reducing dependency on salary.
Investors targeting monthly income do not desire large returns.
Their focus is more on increasing the asset size. The bigger is the asset size, more will be the monthly income.
Lets take an example: Jack’s present dependency on salary is 100%.
All expenses are paid from the monthly salary he earns from his job. He cannot skip even one month salary.
Without salary in hand he may not even pay his monthly grocery and necessary bills.
For person like Jack, what should be the goal?
The goal should be to gradually reduce his dependency on salary.
Jack can target dependency reduction from 100% to 75% in next 3 years.
Suppose ones monthly expense is Rs 100,000 per month & monthly income generated from investment is Rs 25,000.
It means, the person is only 75% dependent on this salary.
The ultimate goal should be to completely replace ‘salary’ with ‘investment income’.
Read More: Monthly income generated from assets is termed as passive income.
#1. Monthly income focused investing is a matured choice…
Imagine that there will be no salary from next month.
How to pay bills? How to fuel car? How to pay EMI? How to pay child’s school fees?
These are few daunting question which are difficult to answer.
Salary dependent people will find it hard to answer such question. To all salary dependent people, monthly income investing should be the top priority.
Salary dependent people MUST get out of this rat race.
People have become so dependent on salary that we have stopped asking such difficult question to ourselves.
Lets start from today, ask yourself, how to pay the EMI if I loose my job?
Throw this puzzle to yourself once every week.
Soon you will find yourself looking for the answer of how to invest for monthly income.
#2 Investing for monthly income generation is a different approach…
Our mind is tuned to think about investment in a certain style. Investment is not only about buy low, sell high.
Investing for income generation is different. In income investing focus is on asset accumulation.
These assets generate stable income.
Assets that promise only capital appreciation will not be eligible for income investing.
People should not mistakenly buy ‘growth asset’ if objective is income generation.
It is true that assets that can generate stable & high yield income are not many.
In this article we will discuss some good income generating assets.
#3. Size of Investment Portfolio & Financial Independence…
I know a person who wants to retire early from job. In next 6 months he will take premature retirement.
But before retiring he wants to be sure that he is financially independent.
He has accumulated some savings and assets etc over the past years.
Now he wants to liquidate those assets and invest them for monthly income generation.
The ‘size of asset’ decides the level of ‘passive income’.
My friend was considering early retirement because he knew that the size of his asset (investment portfolio) is big enough to support his standard of living.
In the below picture, one can clearly visualise how size of ones investment portfolio decides whether one is ‘financially independent’ or ‘financially dependent’.
Above representation highlights how important is the size of investment portfolio.
Bigger will be the investment portfolio higher will be the passive income.
As the investment income grows, person dependency on salary decreases.
Over a period of time a stage will come when investment income is high enough to manage all expenses of life. In this case person in not salary dependent.
Person has become financially independent.
In our example, financially independent person has size of investment portfolio 30 times that of a ‘salary dependent person’.
The size of investment portfolio makes all difference between a common man and a financially independent person.
Invest for monthly income. What can be the returns?
In India, we can expect average yield of 8% per annum.
If a portfolio size of $300,000, it will yield income of $24,000 per annum.
In income investing, size of portfolio is the key. Yield is not high, but more assets means higher income.
In Business terms we can understand it like this.
‘Income investing is more of a volume game than a margin game’.
Income investors do not bother about high returns. They are more busy in accumulating more and more income generating assets.
Income Portfolio is Like a Big Tank…
Investment portfolio can be imagined like a ‘big tank’ of water.
Higher is the level of water in tank, longer one can draw-out water.
Water in tank represents assets in portfolio. Higher water level means more assets.
Dripping water from tank represents ‘income’.
The time for which water will continue to drip is dependent on the height of the water column inside the tank.
More will be the asset, longer will be the income served.
In order to strengthen the asset column, investors shall keep adding income generating assets.
Selection of right income generating options is key.
There is also one concept which is worth noting. Unlike water, there are some assets which not only generates income but also grows in size (like real estate).
Such assets are excellent for income investors.
They provide dual benefits of capital appreciation & income generation.
Lets see easy ways to invest for monthly income in India…
#1. Dividend Paying Stocks
If one wants to invest for income generation, dividend paying stocks can prove very good.
Quality stocks pays regular dividends. Dividend can serve as an excellent alternative income source.
Buying glamorous stocks with objective of short-selling is not income investing.
Income investors buy less fancy stocks that yields consistent dividends.
Not all companies shares profits as dividends. In order to identify a reliable dividend paying stocks, we must look at its dividend history and payout ratio.
If a company has distributed profits consistently for last 7/10 years, then it is a sign of reliability.
Next sign will be the consistency of payout ratio. If a company has paid dividends at payout ratio of 40-50% without variation, it is the second sign of reliability.
Once investor has identified a reliable dividend paying company, they shall then check its dividend yield.
As a rule of thumb, 3% or higher dividend yield is good. But dividend will be paid by company only if makes profits in future.
What can confirm if company will make profit in future?
EPS history (last 10 years) will give a good idea.
If in last 10 years, a company has managed to increase its EPS, it is most likely to do it in future.
If EPS growth rate is faster than rate of inflation it is even better. Combine these two indicators with (a) dividend history, (b) payout ratio & (c) dividend yield, you are looking at great buying opportunity.
#2. Real Estate Property
Real estate property is best for income generation.
Rental income can be as assured as interest income from bank deposits.
Elite investors portfolio are heavily loaded with real estate. As real estate is a tangible asset it is also psychologically soothing for investors to own one.
To top it all, rental income from property is almost assured.
Also, rate of rise of rental income beats inflation. If property is located in a prime location, appreciation on rental income can be far better.
The problem with real estate property is that it is very capital intensive.
A 1-BHK residential property in Mumbai or Delhi will cost close to Rs.65 lakhs.
No matter how good is the yield, but high capital needs prevents many to consider real estate as an income generator.
People buy home for self. But when it comes to income generation, majority consider other options.
Middle class in India buy real estate property for self occupation. Why?
Compare real estate purchase with stocks or mutual funds.
Even if one has just Rs 1000, stocks and mutual funds can be bought. But in real estate investment, Rs.1000 can do nothing.
So what people do? They opt for home loans to buy a real estate property.
Is this the right way? Perhaps yes.
But when people take take 80% of the value of property as home loan, this is not good.
It is easy to opt for home loan. Then buying real estate property becomes easy.
But in this case rental yield falls considerably.
If one can buying real estate property with home loan component below 40%, then there can be no better income generating option than this.
Recently in India some development has been made to bring REITS funds. When we will have REITS in India, one can even invest small amounts and generate credible investing income.
#3. High Interest Paying Savings A/C
In income investing, maintaining liquidity is also very important. Withdraw of funds prematurely without getting penalized is a priority.
Liquidity is a big limitation in high interest paying debt plans.
This is reason why people feel safe in keeping their money in savings account.
But savings account returns are too low, and is also taxable.
But these days banks offer high interest paying savings account. These products are fantastic.
Normally banks offer 4% interest on deposits in savings. This is too low compared to inflation.
But savings accounts have also evolved. They have also found ways to give higher returns to its depositors.
Saving account having a SWEEP facility can do this for its depositor.
I personally use a savings account which automatically pulls funds from savings account and puts it in FD. All funds above Rs 25,000 automatically goes into fixed deposit.
On one side where savings accounts pays only 4% interest, fixed deposits pays close to 7.5%.
Suppose, savings account balance is Rs 100,000. In this case Rs 75,000 goes into fixed deposit.
These Rs.75,000 will continue generating high returns.
I can also withdraw these Rs.75,000 anytime. I can use my debit-card/online-banking to withdraw funds or make online payment.
There are no restrictions.
It is as if all money is in savings account.
New savings accounts not only earns high returns like FD, but also provide complete liquidity.
#4. Bank Deposits (Fixed Deposit-FD)
Banks fixed deposits give high returns.
Fixed deposits ensure interest earnings of 8.5% p.a. But here again, interest is taxable.
Post tax returns of FD’s does not beat inflation. Even the liquidity of your deposit is not so good.
Premature withdrawal of FD calls for penalty.
But still fixed deposit becomes an ideal investment option when it comes to income focused investing.
There are lot of advantage of banks fixed deposits. We can start and redeem Fixed deposits sitting at home.
This can be done even of weekends. By use of online banking, fixed deposits can be managed with click of a button.
These FD’s has options of interest payment on monthly basis. The interest income gets deposited to linked savings account each month on a fixed date.
Retired people looking for option for investing income must definitely consider FD.
If one has funds of say Rs 1.5 Crore. Putting this money in FD (@8% per annum) will generate investment income of Rs.100,000 per month.
Every month this income gets credited into ones savings account.
All banks in India are monitored and controlled by Reserve Bank of India (RBI). Hence, the money that goes into deposits are almost risk free.
#5. Monthly Income Plan (MIP) of Mutual Funds
Monthly income plan offered by mutual funds are not risk free investment.
MIP’s are risky but not as much as equity funds.
The returns of MIP of mutual funds are slightly better than fixed deposits.
How MIP generates income? The income from MIP are distributed in form of dividends.
But these dividends are not profit sharing by companies to shareholders.
MIP of mutual funds invests in all kind of debt linked instruments. These debt instruments generates interest. This interest is distributed monthly/quarterly/half-yearly/yearly among investors.
Typically, portfolio of a MIP mutual fund will include 75% debt instruments, 20% cash & 5% equity.
It is said that dividend distributed to investors by mutual fund companies in MIP are tax free. But fund houses have to pay dividend distribution tax.
So indirectly the cost gets transferred to the investor.
Dividend distribution tax is close to 14% per annum.
There is a very interesting limitation to dividend distribution by mutual funds.
Dividend can only be declared from profit of MIP.
Fund house cannot pay a penny from the accumulated capital from investors.
So this ensures that fund houses will not fake by distributing false dividends even after making loss.
#6. Monthly Income Scheme (MIP) of Indian Post Office
Monthly income plan (MIP) of Indian Post Office is ideal for income generating.
When it comes to retired people, I will suggest Post Office monthly income scheme (POMIS) is best.
There can be other investing income, but none can match the surety of POMIS.
Investing income of POMIS is nearly cent percent guaranteed.
A retired person needs noting more than guaranteed returns.
To get started with POMIS one must first open a savings account in post office.
The investor first puts money in savings account. Then he directs the post office to put this fund in POMIS.
In turn the invested money starts generating monthly income.
Every month the income gets credited to post office savings account. Which can then be drawn by the investor.
Interest earned by investors from POMIS is @ 8% p.a.
There is a upper limit of Rs 4.5 lakhs that can be put into MIP from one post office savings account. If a person has Rs.15 lakh for putting in MIP then he will have to open 4 accounts in post office.
There is no limit on number of accounts one can open in post office.
Returns of debt linked funds are slightly better or equal to fixed deposits. But here the income tax that you pay is much lower (10%) on your capital gain.
The liquidity in debt funds is also better than FD’s as you can sell your units any time without any penalty.
We shall only practice restraint for one year, post one year, after tax returns of debt linked mutual funds will be close to 8% compared to 5.5% after returns of FD’s.
If a person has capacity for spending higher capital, there is no better income generating option than real estate.
For a common man in India, if the objective is to generate regular monthly income from Investments, then debt linked mutual funds are the best available option.