Best Investments to Generate Monthly Income

11 min read • Published 9 October 2022
Written by Anshul Gupta
How you can use investment to generate monthly income

While there is only so much greater satisfaction than pursuing your passion, sustaining a steady monthly income is easy. This situation is 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. You could utilise your assets to supplement your monthly income. 

Thankfully, many of these financial goals can be met by planned investments. You can invest a lump sum or start investing small amounts periodically. While doing so, the question arises: what is the best investment plan for monthly income?

The answer to this question is that they are different for everyone. You must understand various investment options and create the most suitable plan per your needs and risk appetite.  

Also Read: What is the Post Office Monthly Income Scheme?

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. 

These investments have a periodic return, constituting the desired regular 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 get the best returns for a monthly income that suits their needs.

What is the Need for an Alternate Source of Income? 

The COVID-19 pandemic had a startling effect on everyone. Unemployment rose, and the world economy came crashing down. Moreover, inflation is raising its ugly head in the USA, and the war in Ukraine has already started impacting trade and finances worldwide. Life is all about ups and downs, so you never know when you are stuck in a financial crisis. Therefore, it is always a good idea to have an alternate source of income to supplement your primary income. Here are some of the benefits that you enjoy if you have an additional source of income:

  • Having an additional source of income will help you quickly reach your financial goals.
  • Your alternate source of income reduces your reliance on a single income source and prepares you better to overcome unexpected financial challenges. 
  • It also helps you save more funds for a peaceful post-retirement life.
  • Having an additional source of income reduces your chances of getting into a debt trap as you are less likely to take loans for your financial needs.

So, to cushion yourself, you must know how to generate a fixed monthly income from investments, which may help you sustain yourself through tough times. 

How to Use Investments to Generate Monthly Income?

Now that we have discussed the benefits of having an alternate source of income, let us dive straight into the list of alternative investment schemes you can harness to generate a stable monthly income. Below are some of the best investments to generate monthly income that you may consider to strengthen your financial ground and be better prepared for the uncertainties in the future:

1. Equity Share Dividends

Many publicly listed companies share a part of their profits with their investors (shareholders) in the form of dividends. Investing in companies with a high dividend yield can be a great source of passive income. Holding shares of such companies benefits you in two ways- first, you earn from the dividends, and second, you also earn if there is an appreciation in the share price.

Since shareholders need not actively participate in the company’s operations, buying equity shares is one of the most popular ways to generate a passive income.

Being said that a word of caution, though, you must be careful when selecting the stocks to invest in. Investing in stocks that have previously and consistently paid regular dividends might be a good place to start if a stable passive income from dividends is what you are looking for. If you have yet to know how the stock market works, you may also seek guidance from a financial advisor to avoid losses.

2. Corporate Bonds

Bonds are considered a relatively safer investment option. If most of your capital is invested in stocks, consider Bonds investment to diversify your portfolio. Although returns from bonds are lower than stocks, you are hedged against the ups and downs of the equity market. 

When you invest in a corporate bond, you lend your money to the issuing company. Companies issue bonds to raise funds for business expansion, start new projects, or meet their working capital needs.

Corporate bonds are a great way to generate monthly income, as most companies pay you the interest amount regularly during the bond’s tenure. Some corporate bonds, also known as amortising bonds, also pay you a certain portion of the principal amount regularly during the bond tenure. This not only reduces the risk of default but also helps you in earning a regular passive income.

Many corporate bonds can also be traded in the secondary market. This solves the liquidity problem. If you urgently need the money you invested in a bond, you can sell it in the secondary market. However, the bond price will be market-dependent.

3. Mutual Fund Monthly Income Plan (MFMIP)

A mutual fund monthly income plan is another prevalent type of investment to generate monthly income. As the name suggests, a mutual fund is an investment plan where funds are invested mutually. In other words, several investors with a shared investment objective contribute to the fund. 

The fund manager invests this collective fund in equities, bonds, and money market instruments to churn out a profit. The profit thus generated is then distributed among the investors proportionately by calculating the scheme’s Net Asset Value (NAV).

Various mutual fund schemes are available in the market. You can choose one after considering your risk appetite, investment period, and objective. In most cases, you must stay put for at least three to five years before making a profit from a mutual fund. 

If you are looking for a less risky and, at the same time, a steady source of income, then mutual funds can be the right investment vehicle for you. Mutual funds are also subject to market fluctuations- debt funds tend to be less volatile and risky than equity funds.

Also Read: AMFI – Definition, Role, Objective & Importance

4. Annuity

An annuity is an insurance product popular amongst retired individuals. An annuity is a contract between the insurance company and the investor that mandates the insurance company to pay a certain sum of money regularly to the investor for a certain period. Some annuity schemes promise regular payouts throughout the remaining life of the investor.

Types of Annuity:

Annuity schemes are primarily of two types:

  • Immediate Annuity: These annuity plans require you to pay a lump sum amount to the insurance company, and the payouts start immediately. These plans are chosen by individuals who have already retired and want a stable passive income for the rest of their lives. Depending upon the plan chosen, the payouts can be either for a certain period or the investor’s remaining life.
  • Deferred Annuity: These are retirement schemes for individuals who are yet to retire but want to start investing in maintaining a stable inflow of cash post-retirement. These plans have a certain accumulation period during which the investor invests a certain amount regularly (just like SIP). After this accumulation period, the annuity starts paying at regular intervals (in some cases, it can also be a lump sum payment). 

Unlike stocks, bonds, and mutual funds, annuities offer additional benefits, such as tax exemption and premium protection. Many annuity plans promise a lifetime payout. Generally, annuity plans are designed to consider inflation and rising medical expenses. Hence, an annuity is an excellent way of investing to generate monthly income.

5. Monthly Income Fixed Deposits (MIFD)

Fixed Deposits (FDs) are one of the most commonly invested and secured financial schemes. You can make a small investment in monthly income FDs. Depending on the bank’s policy, you can start with an amount as low as ₹1,000 – ₹5,000, depending on the bank’s policy. The interest rate ranges from 2.50% per annum to 8% per annum, depending on the bank and the tenure of the FD. 

The interest is credited to your savings account monthly, quarterly, half-yearly or annually. The interest received from bank fixed deposits is fully taxable. However, some tax-saving Fixed Deposits with a minimum lock-in period of 5 years allow you to claim a deduction of up to ₹1,50,000 under section 80C from your net taxable income.  

What makes FDs one of the preferred choices for investment despite relatively lower returns is the fact that your principal amount is always protected unless the bank itself goes bankrupt. Moreover, to make FDs even more secure, the RBI provides complimentary insurance of up to ₹5 lakhs to all bank account holders.

6. Post Office Monthly Income Scheme (POMIS) 

The Post Office Monthly Income Scheme (POMIS) is a traditional investment scheme offered by Post Offices in the country and backed by the Government. It has a fixed tenure of 5 years and a reinvestment option after 5 years. Early withdrawal attracts a penalty per scheme guidelines.

Presently, the rate of interest offered under this scheme is 6.6% annually. You must invest at least ₹1,500, and the maximum limit varies based on the account type: minor account/ joint account or single account.

POMIS is a low-risk scheme as the money invested is not subject to market fluctuations. The deposit amount is also nominal, making it affordable for people from all financial backgrounds.

7. Corporate Deposits or CDs

Many NBFCs and housing finance companies in India provide investment opportunities in corporate deposits. These are term deposits, wherein you put your money in for a fixed tenure at a fixed interest rate. You can negotiate an agreement and receive interest payments on the deposit. 

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.

Also Read: List of Best Places to Live after Retirement in India

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 be different 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, an ideal monthly income plan aligns with your needs and situation. Hence, you must carefully understand your needs and select the right plan.

Final Word

The blog 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 a reliable income without being dependent on others. 

Hence, creating a periodic income stream is critical to allowing you to live as you like. To achieve this, you must carefully weigh your profile and choose the best investment plans for your monthly income.

Frequently Asked Questions

1. Is investment in dividend yielding stocks risk-free?

No, any investment in the stock market, including in dividend-yielding stocks, is not risk-free. Therefore, it is always advisable to carefully examine the company’s fundamentals before making an investment decision. If you have yet to gain prior knowledge of the stock market, it is better to take the help of a financial advisor.

2. Is there a minimum age for opening a Fixed Deposit?

An FD has no minimum age restriction. It can be opened on behalf of a child as young as one year by their parent or guardian.

3. 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.

4. Can I make a 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.

5. What are the benefits ​​of SWP over FD?

The SWP taxation applies only to capital gains (either short-term or long-term capital gains tax). However, interest earned on FD is entirely taxed unless it is a tax-saving long-term FD. 

Was this helpful?

Anshul Gupta

IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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