For the next six months, I want to generate a regular monthly income by preserving the principal amount. I am considering to invest Rs 5 lakh. I am already investing through SIPs in HDFC Equity, HDFC Top 200, Franklin India Bluechip and Kotak Gold ETF. I don't want to tamper with existing investments or future SIPs in these funds. Once the monthly income requirement is over, I will add another fund, a mid- and small-cap like IDFC Premier Equity Plan A to this portfolio.
— Sunil G
For regular monthly income along with capital safety, you should opt for bank fixed deposits. However, if you are willing to take some risk, short-term debt funds could provide better returns. Compared to a 6-month bank fixed deposit which pays 6.5 per annual interest, short-term debt funds have delivered 9.65 per cent return in the past one year.
These funds pay regular dividends and have a monthly and weekly dividend option and invest in commercial papers, certificate of deposits, bonds, etc and the funds' maturity goes up to 4.5 years. Although the returns are market-linked, these funds are not risky as they are tightly regulated and monitored by Sebi to guard investors' interest. Moreover, as these invest in papers of smaller duration, the risk from fluctuating interest rates is averted.
Where these score over bank deposits is the tax efficiency embedded in them. Unlike bank fixed deposits, which are tax inefficient as the interest earned in them is added to your income and taxed accordingly; short-term debt funds not only earn additional returns, they are also tax efficient. The dividend option in these funds is taxed at a lower rate of 13.51 per cent (12.5 per cent + 5 per cent surcharge + 3 per cent cess). Although short-term gains (less than a year) from these funds will be added to your income, long-term gains will be taxed at 10 per cent without indexation and 20 per cent with indexation.
This article was originally published on March 19, 2013.
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