Mutual funds have quickly gained the reputation for being user-friendly investment instruments. Almost every soul old or young is now viewing mutual funds as a safe investment option and have started investing in their personal capacities. Where investments are usually done from the point of view of saving and earning returns on the invested amount. There is also a school of thought that one can earn a monthly income by making the right investing moves!
So if one asks whether it is possible to invest for a monthly income> The answer is “YES” It’s possible. By either choosing a systematic withdrawal plan on debt funds or equity savings funds. But remember a few things:
IGNORE any advice on a dividend option on a balanced fund. This is just hogwash. If the balanced funds don’t earn a return that is sustainable for the dividend yield (say 1% a month), they deduct the money out of your own principal!
- Think of it this way – You invest 100 rupees in Balanced Fund A and if they have no gains, they give you 1 rupee as dividend while your investment value becomes 99!
The dividends that you receive from the mutual funds are not really “tax-free”. While you might be tempted to choose the dividend mode on mutual funds, thinking you are receiving tax free income do note that the mutual fund houses have to pay something called a “dividend distribution tax” which ranges from 10% (effectively around 12 odd per cent) on equity schemes to around 29% on debt schemes. While you don’t have to pay this tax, the mutual fund house will deduct this from your returns only.
For a monthly income, I would suggest you go for a debt fund. It has no exit load and also set up a systematic withdrawal plan rather than the dividend option.
Read this to know more about dividend payouts: