How to generate monthly income for my mother

Since your mother is over 60 years, capital safety should be an important consideration for her. However, if she is just above 60, you should also ensure that her capital lasts for a long period of time. Inflation erodes the value of capital over a period of time. Equity as an asset class, can beat inflation over a long time horizon. Therefore, financial planning experts recommend that investors, even above 60, have some equity in their asset allocation. A popular rule of asset allocation, the Rule of 100, suggests that investors should have (100 – their age)% allocated to equities and the balance to debt. Depending on your mother’s age, her financial situation, you need to decide on her asset allocation.

Your mother’s income need is Rs 5,000 / per month from an investment of Rs 800,000. This implies that she expects a return on investment of 7.5% per annum. While mutual funds do not assure returns, based on long term historical performance, you can possibly generate the returns your mother needs by investing in mutual funds. You can select a portfolio of balanced and debt mutual funds for your mother’s investment portfolio. Within debt funds, you can select income funds or monthly income plans depending on your mother’s asset allocation needs. Balanced funds invest 65% or more in equities and the balance in debt. Monthly plans invest around 20 – 25% in equities and the balance in debt. Income funds invest 100% in debt. Obviously higher the allocation to debt, lower is the risk, but also, lower the potential returns. Once you determine your mother’s asset allocation, i.e. percentage of investment allocated to equity and debt respectively, you can determine how much you should allocate to balanced funds, monthly income plans and income funds respectively. Balanced Funds have given on an average around 13%, Monthly Income Plans around 11% and Income Funds around 8% compounded annual returns over a long time horizon. Top performing funds in these categories have given even higher returns. So based on current performance, they should be able to meet your mother’s income needs. However, you should note that mutual funds are market linked instruments and current performance may not be sustained in the future. So, should you decide to invest in mutual funds, you should monitor your mother’s investments on a regular basis and make appropriate adjustments from time to time.

Further, your mother’s tax status should inform her investment strategy. If she is in the highest tax (30%) bracket, tax wise it will be prudent for her to invest in the mutual fund dividend options for her income needs. On the other hand, if she is in a lower tax bracket, she can invest in the growth options and opt for systematic withdrawal plan (SWP). Through an SWP, she can withdraw a fixed amount every month for her expenses, while her balance investment stays invested, continues to earn returns and grow.

If you opt for the dividend option, you should note that top performing balanced funds have given annual dividend yields in the range of 7 – 8% over the past few years. Top performing monthly income plans have given annual dividend yields in the range of 5 – 7% over the past few years. While some balanced funds give monthly dividend options, others have quarterly, half yearly or annual dividend options. Most of the top performing monthly income plans have monthly dividend options.

We have provided a general guidance here. You should discuss your mother’s income needs and financial situation with your financial advisor, to determine the most optimal fund selection and investment plan for your mother.