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Investor query
Wed, Jul 04, 2012
Source : Sanjay Singh, Citrus Interactive

What's a good way to invest Rs 15 lakh to get a monthly income with safety of capital? - Anonymous

Basically there are four instruments that can get you a guaranteed income stream: Senior Citizens Savings Scheme, bank fixed deposits, Post Office Monthly Income Scheme, and annuities from life insurance companies.

Senior Citizen's Savings Scheme. If you are above 60 (those who are 55 and have availed of VRS can also apply), then SCSS, which pays an interest rate of 9.30 per cent, is a good option. You get a tax deduction of up to Rs 1 lakh on investment. You can invest up to Rs 15 lakh. The scheme has a tenure of five years which can be extended by another three years. This scheme makes quarterly pay-outs. But you can have the money deposited in your Post Office Savings account and withdraw a part of it every month. The interest earned on the deposit is fully taxable and tax is deducted at source (TDS) if the total interest earned in a year from this instrument is above Rs 5,000. However, if your income is below the taxable limit, then you may provide form 15H or 15G and ensure that no tax is deducted at source.

Bank fixed deposits. Public sector banks are currently offering 9-9.40 per cent on fixed deposits of five years and above (9.75-10 per cent to senior citizens). Private banks are offering 8.75-9.50 per cent (9.25-9.80 per cent to senior citizens). Look for deposits that offer the monthly interest payment option. This interest income is added to your income and is taxed at the applicable income tax rate. Tax is deducted at source (TDS) at 10 per cent if the interest income you earn is above Rs 10,000 per annum per bank branch.

Post Office Monthly Income Scheme. It pays an interest rate of 8.5 per cent (tenure six years). The interest income is paid out monthly. The income earned from POMIS is taxed at marginal income tax rate.

All these medium-term investment products carry a reinvestment risk. If interest rates move down when the tenures of these instruments end, you will have to reinvest at a lower rate of interest.

Annuities. Another option that can give you a guaranteed income is an annuity from a life insurance company. With rising life spans, one can’t predict how long one will live. There is always the risk of outliving one’s savings. Annuities protect you against that risk since they guarantee that you will be paid a fixed amount of money so long as you live.

In case of annuities, the returns tend to be lower than what you would receive from a medium-term fixed-income instrument. The amount you receive will also depend on the option you choose: whether you want to be paid a fixed amount for a fixed period (say, 10 years), for your lifetime, or until either you or your spouse is alive.

Thus, all the above mentioned instruments have their pluses and minuses. SCSS, bank FDs and POMIS carry the reinvestment risk. All these three fixed-income products will be affected by inflation.

You have not told us whether Rs 15 lakh is your entire corpus, or whether this is the part that you wish to use to generate a monthly income. Nonetheless, here are a few additional things you should keep in mind. Some part of your savings, say about 20 per cent, should be kept as a contingency fund in a liquid instrument (bank deposit or liquid funds of mutual funds) in order to meet emergency needs (such as a sudden hospitalisation). Some part of your savings should also be invested in equity mutual funds (large-cap) so that the corpus grows and helps you combat inflation.  

The corpus that you wish to use for generating a monthly income can be split among the four instruments mentioned above.

We have not advised you to invest in monthly income plans (MIPs) of mutual funds. While dividends paid by these funds can be potentially higher (than what Post Office schemes or bank fixed deposits pay), depending on how the equity component of these funds perform, there is no guarantee that they will pay a dividend every month. The dividend paid can also vary from one month to another. Invest in these schemes only if you can handle these risks.

send your queries at sanjay.singh@citrusadvisors.com,  shoaib.zaman@citrusadvisors.com
 
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