If you are looking at steady returns then you cannot really take on too much risk. You can put the money either in liquid funds or in short-term funds
Warren Buffett has said if you cannot create a second source of income by the age of 45, then you have really done injustice to yourself. The question is whether creating a second source of income is possible when you are employed? The answer could lie in mutual funds.
Create a corpus and let it pay you
The power of compounding means that if you invest small sums of money consistently in productive assets like equities, then you can create a tidy corpus for yourself. Let us look at some numbers. Rakesh is 25 years and earns Rs 85,000 per month in an e-commerce company. He can easily invest Rs 15,000 per month in an equity fund after meeting expenses. But can this really make a difference?
The figures show that that the wealth has multiplied by 4.46 times there is a ready corpus of Rs 1.60 crore at Rajesh's disposal, at the age of 45. Now the question is how to use this corpus?
Steady returns means safe investments
If you are looking at steady returns then you cannot really take on too much risk. You can put the money either in liquid funds or in short-term funds.
As can be seen from the table, from the age of 45 onwards, Rakesh is able to create a big source of additional income by just planning and investing Rs 15,000 per month in equity SIP today. That is how simple it is to create a regular stream income by planning early. Here the investment is safe and you are assured an additional source of income from age of 45 till eternity. But, what if you want to enjoy a higher income for a limited period of time?
SWPs could be the answer
The above arrangement would have worked fine if Rakesh was looking at inflows for perpetuity. But Rakesh has a different problem here. He wants his corpus of Rs.1.60 crore to generate a monthly income of at least Rs 1.25 lakh per month, till he turns 60, so that his enhanced monthly expenses during the period is taken care of. Since Rakesh requires the higher outlay only for a period of 15 years, he can rather structure the funds as a systematic withdrawal plan (SWP) in a short-term fund. That way, the idle money continues to earn returns at 5.5% in a short- term fund.
The corpus of Rs 1.60 crore, if invested in a short-term fund, conservatively earns around 5.5% per annum. While a portion of the corpus is withdrawn each month for a period of 15 years, till the age of 60. For simplicity, we have considered annual periods, but the annual SWP of Rs 15,98,000 will translate into monthly income of around Rs 1,33,166.
That more than meets Rakesh's needs of an additional Rs 1.25 lakh per month till the age of 60. Additionally, since the withdrawal is structured as an SWP, capital gains tax will only apply on the return portion and not on the principal portion, which makes this method a lot more tax efficient. Plus, from the fourth year, he will also enjoy indexation benefit, which will lower the tax.
Your own monthly SIP can be used to create multiple streams of income, provided you start off as early as possible.
The writer is chief revenue officer, Angel Broking
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