I want to earn an inflation-adjusted income of Rs 3 lakh per month for the next 15 years. What should be my corpus and what instruments should I invest in to have a reasonable certainty of getting this amount after providing for inflation and tax (assuming highest tax bracket).
— Nripjit Singh Chawla
You will require a corpus of Rs 4.45 crore for your inflation-adjusted income need of Rs 3 lakh per month for the next 15 years. We have considered long-term inflation rate at 6 per cent a year and weighted average post-tax returns from investment at 8.85 per cent a year. The asset allocation should be 70 per cent in debt (7.5 per cent annual returns) and 30 per cent in equity (12 per cent annual return).
The rate of return (and hence the corpus) will change if the asset allocation is changed depending on investor’s risk profile. We recommend allocating higher amount to debt investment as you require regular income with reasonable certainty. Additionally, equity will help beating inflation in the long run.
Generally, retirement income is provided through dividend and interest payout. However, all the interest income is taxable at applicable tax slab rate. Even in terms of dividend income, the dividend distribution tax is 28.84 per cent on the
dividend distributed by debt mutual funds. Providing income through interest and dividend income is a highly tax-inefficient strategy.
For the first three years: We recommend investing the amount equivalent to first three years’ income need in arbitrage and liquid plus funds with dividend reinvestment option. You can then register a systematic withdrawal plan (SWP) of the monthly income need from the same.
From fourth year onwards: Register systematic withdrawal plan (SWP) from the long term debt funds (more than three years). Since the investments will be long term, you will get the indexation benefit on redemption and hence the capital gains tax will be minimal.
I am expecting Rs 10 lakh from the sale of my ancestral property next month and I want to invest it safely. My wife and I together are retired government employees and together we get a monthly pension of Rs 50,000. That takes care of our monthly expenses. I was thinking of putting the money in a debt fund. What kind of debt fund should I go for? All our other savings are in FDs, about Rs 50 lakh.
— Sandeep Bhasin
Considering that you and your wife have retired and the main goal of your investments is capital preservation, we recommend investing in good quality debt oriented funds. Debt funds provide stability to the portfolio. Further, they are better investments, as compared to fixed deposits as you get higher post tax yield from debt funds. While selecting a debt fund, there are two factors you need to consider. First, the credit quality of the debt instruments the fund invests in and second, the current interest rate scenario in the economy. In the current scenario, we recommend you to invest in good quality (AA/ AAA rated papers) short to medium term debt mutual funds where the portfolio typically has papers that mature in two to three years.
The writer is founder and CEO, My Financial Advisor.
Send your queries to firstname.lastname@example.org