The Top 3 Ways to Generate an Income From Your Investments

Very few things confuse investors more than the question of how to generate a dependable, tax efficient income stream from their investments. This question is especially important for a proper retirement planning. Some investors keep their money lying in low-yielding fixed deposits, while still others buy annuities and lock in low yields for a lifetime. If you’re recently retired from work and are flush with cash, here are the top 3 options for you to consider for your income generation portfolio.

Government Led-Schemes

Although their returns are not taxed efficient, it makes sense to allocate a certain portion of your corpus to sovereign guaranteed pension generation schemes that provide you moderate returns. Doing so helps build a solid base for your recurring expenses while reducing the overall risks associated with your retirement investment portfolio.

You can consider allocating up to 30% of your corpus into a mix of three sovereign backed schemes – the PMVVY (Pradhan Mantri Vaya Vandana Yojana), the SCSS (Senior Citizens Savings Schemes) and the POMIS (Post Office Monthly Income Scheme).

The PMVVY provides you with a guaranteed return of up to 8.3% per annum for ten years, while the SCSS and POMIS provide you with a 7.6% annualized return for a period of 5 years. Unfortunately, the maximum monthly income generatable from the higher yielding PMVVY is capped at just Rs. 5,000 per month.

Retirement Planning with Systematic Withdrawal Plans from Debt MF’s

Mutual Fund investors who are looking to generate investment income often tend to blindly select the ‘dividend payout’ option, without understanding its nuances adequately. Dividends from debt mutual funds are taxed at source at 28.33%, making them a poor choice.

Instead, investors should invest in debt funds with the potential to deliver 8.5% to 9% annualized returns after consulting with a qualified Financial Advisor, and start monthly SWP’s (Systematic Withdrawal Plans) that would add up to the projected growth amount.

For example, if you invest Rs. 10 lakhs into a debt fund, and expect it to grow by Rs. 90,000 in the year, you can start an SWP of Rs. 7,500 from it. This would be a lot more tax efficient than receiving dividends, since only the profit component of the monthly withdrawal of Rs. 7,500 would be subject to STCG (Short Term Capital Gains Taxes).

Retirement Planning with Dynamic Asset Allocation Funds

Another option worth considering is dividends from Dynamic Asset Allocation Funds (DAA’s). DAA’s function like balanced funds, but they continuously adjust their allocation between equity and debt, based on certain key market valuation indicators such as Price to Earnings Ratio, Price to Book Value Ratio, or Market Cap to GDP ratio.

Over the long run, they have a high chance of outperforming pure debt funds, as they harness the growth potential of equities in a risk adjusted manner. They add that much needed ‘kicker’ to your portfolio. The best part about dividends from DAA’s is that they are tax free from day one, as these funds enjoy the same tax efficiency as pure equity based mutual funds. Some DAA’s, such as ICICI Prudential Balanced Advantage Fund (BAF) is worth considering in this regard, due to their exemplary dividend payout track records.