Investing a lump-sum today

By Mohasin Athanikar |  21-07-20 | 
 
No Image
About the Author
Mohasin Athanikar is an Investment Analyst for Morningstar Investment Adviser India.

I have Rs 40 lakh that I need to invest for around 12 to 24 months. I want to generate monthly income from this to the tune of Rs 25,000 per month. Where must I invest the amount? A hybrid fund?

Having a big chunk of cash to invest is a very empowering feeling, but also a big decision.

Normally, the advice in such situations would be to resist from acting in haste, because that is when mistakes are made.

If you had a lot of debt, we would have advised you to pay it off. Alternatively, if you had no Emergency Fund, we would have suggested that this money could be utilized to creating one. But we are clueless.

So we shall base our suggestions on 2 factors:

  • Time frame: The time horizon is very short, between 12 months to 24 months.
  • Objective: Since you want to invest it for drawing a monthly income, we have looked at capital preservation as the prime need, not growth.

Given the very short time frame, the current bleak economic scenario and high volatility in the equity market, it is advisable to avoid any exposure to equities to minimize downside risk to your portfolio. Equity investors cannot have a short-term horizon because the volatility can wreak havoc with a portfolio. Among hybrid funds, even conservative hybrid funds typically have about 20% exposure to equities.

Our suggestion is that you invest the entire amount into fixed-income instruments.

Amid the surplus liquidity in the banking system, and rate cuts by the Reserve Bank of India, the interest rates on fixed-income instruments have plunged over the last year and half. Consequently, yields on fixed-income mutual funds too have come off (around 5 - 6% for shorter duration categories).

Since you have specifically mentioned the monthly withdrawal requirement, you can consider parking the corpus into shorter duration accrual fixed income funds with a high credit quality portfolio, such as corporate bond, short duration, low duration and ultra-short term funds.

You can look at the analysis of certain funds to help you arrive at a decision. You can also view fund performances.

If you are a senior citizen with taxable income, you can consider parking around Rs 9 lakh in bank fixed deposits, interest under which is tax deductible up to Rs 50,000 under section 80 TTB for senior citizens.

Currently, fixed deposits of the leading public sector and private banks offer interest rates in the range of 5.1% – 5.4%, with an additional 50 bps for senior citizens.

Given these low interest rates prevalent, you would be able to withdraw about Rs 18,000 per month, on a pre-tax basis. Please consult a professional financial adviser before investing.

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries ONLY relating to mutual funds and portfolio planning.

Add a Comment
Please login or register to post a comment.
ninan joseph
Jul 26 2020 08:12 PM
 You have a short term horizon and you need monthly income. Dont make it monthly, make it quarterly and put money in different family names as FD. Spread the deposit and give 15G form so tax is not deducted. Dont risk your capital, from your quarterly income, buy ETF.
1<>
Top
Mutual Fund Tools
Feedback