Should you invest in FDs for regular income?

Fixed deposits or FDs have been a staple investment avenue for Indians as they provide a guaranteed income. But not many understand that in the long run, the returns on FDs are not meaningful because they are unable to beat inflation. FDs are not tax efficient because the interest earned is taxable at your slab rate and the tax liability accrues even if you do not redeem the same. So clearly, you need to look beyond FDs to identify better investing avenues.

Before you start investing you need to first decide what you are looking for and what your expectation from the investment is. While many investors understand that equity is the holy grail for long-term wealth creation, the importance of having some allocation to equity even when one is looking to generate a regular income might not look obvious to you. So, you must invest the corpus amount in a mix of equities and debt, if your objective is to derive regular income from that investment.

Equity is needed to make sure that your corpus grows over time and does not succumb to inflation. However, the equity allocation in your portfolio depends on your needs and what all the sources of income you have. If you're looking for a regular income and if this is all that you have along with a small source of other income (if any), then around one-third of the amount should be invested in equities and the rest in fixed income. The equity portion will ensure the growth of your corpus in real terms while fixed income will provide a stable regular income for monthly expenditures. If you can take some risk with this money then you can increase your equity allocation but if it's the only source of income you depend upon, then you should be a little more conservative.

For the debt portion, there are a couple of options. If you are a senior citizen, then you can go for government-backed investments such as the Senior Citizen Savings Scheme (SCSS) or Pradhan Mantri Vaya Vandana Yojana (PMVVY). If not, debt mutual funds work equally well for both retirees and non-retirees. Debt funds are tax efficient and much better than FDs. You can go for short-duration funds and set up a Systematic Withdrawal Plan (SWP) from there. For the equity allocation part, you can go for pure equity funds such as flexi-cap funds. Flexi caps are diversified so they fit well.

Since the equity market has its ups and downs and you'll be withdrawing from the fixed income portion for your income needs, your desired debt-equity allocation will change. So, you would have to rebalance your portfolio periodically by transferring money between equity and debt. If you initially planned for one-third in equities and two-thirds in debt, then you must rebalance it to the same proportion, say once or twice a year.

If this rebalancing exercise looks tedious and complicated to you, you can also go for an equity savings fund. It is a hybrid fund that invests about one-third each in equity, debt and arbitrage. Since the gross equity allocation will be above 65 per cent, the tax treatment will be like a pure equity fund. The debt and arbitrage portion give you a decent stable return. Hence, they are a convenient option to derive regular income and get your portfolio automatically re-balanced in a tax-efficient way.

Suggested read: What is the three-bucket strategy to get regular income from retirement corpus?