While there is hardly any greater satisfaction than pursuing your passion, it is not easy to sustain without a steady monthly income. This situation is quite common if you are a freelancer, solopreneur, artist, etc., where the income faces continuous highs and lows.
Moreover, the need for monthly income can also arise when you are nearing retirement and want to continue the same living standards once your salary pauses. Not only that, you could just want to utilise your assets to supplement your monthly income.
Thankfully, many of these financial goals can be met by planned investments. You can either invest a lump sum amount or start investing small amounts periodically. While doing so, the question that arises is, what is the best investment plan for monthly income?
The answer to this question is that they are not the same for everyone. You must understand various investment options and create the most suitable plan as per your specific needs and risk appetite.
What is a Monthly Income Scheme?
A monthly income scheme is an investment instrument where an investor invests an amount and receives returns on it periodically, i.e., every month. Examples of monthly income schemes include fixed deposits, SWPs, Post Office Monthly Income Schemes, etc.
All of these investments have a periodic return, which constitutes the desired periodic income. However, it must be noted that these instruments could differ in their risk, return, period of payment, etc. Investors can invest in a mix of such schemes to work out the best investment plan for a monthly income that suits their needs.
The Best Investment Plan for Monthly Income
As discussed above, there cannot be a one-size-fits-all best monthly investment plan. Everyone has different financial goals, risk-taking abilities, and investment horizons.
In order to identify the best monthly income scheme for your needs, let’s first get to know about the various monthly income schemes available:
A bond is a loan raised by a government or a corporate entity. It offers either a fixed or floating rate of interest, called a coupon, to the buyer. The coupon rate is charged on the face value of the bond, and generally these coupon payments are paid to the investor monthly, quarterly or semi-annually. In some cases, coupon payments can be paid on maturity along with the principal amount of the bond.
In addition to this fixed source of periodic payments, you also receive the face value of the bond on maturity.
Bonds are a great investment option for risk-averse investors. For example, long-term government bonds (15-20 years) generally offer an 8% return bi-annually. These bonds trade in secondary markets and are nearly risk-free. Furthermore, you can combine these bonds with other investments to earn income throughout the year. A drawback of long-term bonds is that the principal amount gets locked in till maturity.
Fixed Deposits or FDs
FDs are one of the most popular income schemes with low risks and fixed returns. Here, you can invest a lump sum amount of money at a predetermined rate of interest and for a fixed time-period.
The interest earned on the amount is either paid at maturity or on a periodic basis depending on your choice. In case of periodic payments, you have further flexibility of opting for a monthly, quarterly, semi-annually, or yearly pay-out.
Because of the fixed interest-rate, FDs are a great way to balance the overall risk in your portfolio. They are traditionally considered ideal for conservative investors. But, even if you have a medium-to-high risk appetite, investing in fixed deposits will counter-balance the risk from market-linked instruments like equity.
In addition to this, the emergency funds or emergency corpus which one has created can be invested in FD because of fixed returns, high liquidity and low risk. This will ensure that your corpus keeps on making money and also is available for any emergency.
Post Office Monthly Income Scheme (POMIS)
This monthly income scheme is in the form of interest paid on a deposit. This deposit is made with the Department of Posts, Indian Post. It is a government-sponsored scheme, and the Department of Posts reviews the interest rates every quarter. Since these deposits are government-backed, the credit risk is almost nil.
However, there is a maximum limit of Rs.4.5 lakhs in an individual account and Rs.9 lakhs in a joint account, that you can deposit under the post office monthly income scheme. Your investment in POMIS can be combined with other investments with monthly returns to get the desired income.
Corporate Deposits or CDs
Many NBFCs and housing finance companies in India provide opportunities to invest in corporate deposits. These are term deposits, wherein you put your money in for a fixed tenure at a fixed interest rate. These are just like FDs, but offer a higher rate of return. You can negotiate an agreement with the NBFC and receive interest payments on the deposit, quarterly or semi-annually, as per your needs.
Therefore, investors must only invest in corporate deposits after checking the NBFC’s or company’s credit rating. Corporate Deposits can be combined with other plans to create the best monthly income plan with higher returns.
Monthly Income Plan
A monthly income plan is a mutual fund that pays monthly dividends to its investors. It invests 10-30% of its corpus in equity-related instruments and the rest in fixed-income securities.
The dividends paid by the fund, however, are not fixed and depend on the profits of the fund. So, there is a possibility of not receiving any monthly income during certain periods. Therefore, one must carefully consider their needs and risk profile before investing in these funds.
Mutual Funds – Systematic Withdrawal Plans
A Systematic Withdrawal Plan (SIP) in a mutual fund is a plan where one invests a corpus in a mutual fund and can withdraw a fixed amount from it periodically. One can choose to either withdraw a set amount or any capital gains from the fund. The withdrawal can be done monthly, quarterly, half-yearly, or annually.
Who Should Invest in a Monthly Investment Plan?
Anyone can invest in a monthly investment plan. What could be the best monthly income scheme for one person may not be so for another.
For instance, investing in short-term government bonds, liquid funds, and post office monthly income schemes could be an ideal choice for an investor looking for stable returns over a shorter time horizon.
On the other hand, for an investor with a moderate to long-term vision, investments in National Savings Certificates, various mutual funds-based monthly income schemes like large-cap mutual funds, etc., could yield significant returns.
Finally, for an investor looking at a long investment horizon, a systematic withdrawal plan or a monthly income plan could be the best investment plan for monthly income. Investors seeking tax benefits could invest in National Savings Certificates, monthly investment plans in ELSS funds, etc.
Therefore, you can see that an ideal monthly income plan is the one that aligns with your needs and situation. Hence, you must first carefully understand your own needs and then select the right plan.
The article talked about various monthly income schemes suitable for different needs. Especially in contemporary times when sabbaticals, unpaid internships, freelancing, and early retirement rule the roost, you need to have your own reliable income without having to be dependent on others.
Hence, creating a periodic income stream is highly critical to giving you the freedom to live as you like. To achieve this, you must carefully weigh your profile and choose the best investment plans for your monthly income.
FAQs about Best Investment Plan for Monthly Income
Is there a minimum age for opening a Fixed Deposit?
A FD has no minimum-age restriction. It can be opened on the behalf of a child as young as one year, by their parent or guardian.
Is there any nomination facility available in POMIS?
Yes, under the POMIS scheme you can select and appoint a nominee against the account. In the case of your unfortunate demise, the nominee will get the accumulated amount.
Can I do premature withdrawal from my POMIS account?
Yes, you can withdraw money prematurely from POMIS after 1 year of deposit. However, if you withdraw before 3 years you will be charged a deduction of 2% on deposit, and 1% after 3 years.
What are the benefits of SWP over FD?
The taxation on SWP is applicable only on capital gains (either short-term or long-term capital gains tax). Whereas, interest earned on FD is entirely taxed, unless it is a tax-saving long-term FD.