Investments in equity should be done for long-term and done in a systematic manner...
11-Feb-2013 •Research Desk
For the next six months, I want to generate a regular monthly income by preserving the principal amount. Which funds would you suggest and how can I achieve this objective? I am considering to invest around Rs 5 lakh. I am already investing in mutual funds which I don’t want to tamper with. Once the monthly income requirement is over, I will add another fund (mid and small cap) like IDFC Premier Equity Plan A to my portfolio.
If you want regular monthly income along with safety of your capital then you should opt for bank fixed deposits. If you are willing to take slight risk, short-term debt funds could provide better returns. Banks give an annual interest of 6.5 per cent on an FD of six months while debt short-term funds have delivered a return of 9.65 per cent in the past one year. These funds are capable of earning extra return and are more tax efficient than FDs. Even in their worst quarterly performance, 84 per cent of these funds have never delivered negative return.
The interest from bank FD is taxed according to your income slab. Hence, the post tax return will be low. Short-term debt funds are tax efficient as their dividends are taxed at a lower rate of 13.519 per cent inclusive of surcharge and cess. Although short-term gains (less than a year) from these funds will be added to the individual's income but long-term gains will be taxed at 10 per cent without indexation and 20 per cent with indexation.
Also, many funds have monthly and weekly dividend option and pay dividends regularly. These funds invest in corporate papers like commercial papers, certificate of deposits, bonds etc and the fund's maturity goes up to 4.5 years. Although, the returns are market linked these funds are not risky at all as they are tightly regulated and monitored by SEBI to guard investor's interest. Since they invest in papers of smaller duration, the risk from fluctuating interest rates is averted.