Any income received at a fixed interval can be called regular income. Salary, wages, pension, monthly interest payments, etc., are classic examples of recurring income.
Mutual funds have been gaining popularity over the years as a viable option to make regular passive income because of the following reasons:
- You can create wealth by investing a lump sum for the long term. Alternatively, you can regularly invest a small amount through a systematic investment plan (SIP).
- Mutual funds tend to beat inflation in the long term.
Ways to achieve regular income through mutual funds
Monthly Income Plan (MIP)
MIPs are hybrid mutual funds that are predominantly debt-oriented, which means the larger share of the investment is in fixed instruments and government bonds. Therefore, they are moderately risky. They can pay regular dividends depending upon their market-linked profits.
However, MIPs do not provide a fixed monthly income, unlike the name suggests.
Systematic Withdrawal Plan (SWP)
Investors can use SWP to redeem their MF investments or the interests earned over them in a phased manner.
For example, you can instruct your mutual fund manager to withdraw Rs. Ten thousand from your fund and deposit the amount in your bank account whenever your fund accumulates an interest of Rs. 1,00,000.
Systematic Transfer Plan (STP)
An STP is used to switch units from one MF scheme to another scheme of the same fund house per the investor’s mandate.
For example, you can instruct your fund to transfer 50 units from your equity fund to your debt fund every month.
Which plan is the best?
The answer may vary depending on financial goals, income stability, etc. Make sure to go through the following checklist before deciding which MF regular income scheme is best suited for you:
- How much liquidity would you like in your investments? Do you want to lock your assets for a longer duration, or would you like to withdraw your investments at any time?
- What are the cash flow requirements to meet your regular expenses?
- What are the taxes involved? Will they benefit you?
Taxes on mutual funds
Dividend Distribution Tax (DDT)
DDT paid by companies was abolished with effect from April 1, 2020. Investors need to pay income tax on the dividend income as per the tax slabs.
Capital Gains Tax
There are two types of capital gains taxes based on the holding period – short-term capital gains tax and long-term capital gains tax. They have different rates. The holding period for classification under short-term or long-term capital gains varies with different types of funds.
The final verdict
Whether to supplement your salary or to sustain your finances after retirement, mutual funds income could be our regular source if you manage to stay invested for a long time.
Moreover, a longer investment horizon could lower the risks from short-term market volatilities and various tax implications.
It is advisable to consider mutual funds for their potential to create wealth, regular income generation, and long-term capital appreciation for investors.