Need periodic income before rejoining work? Here’s how to invest.
I recently sold my business and have saved around 50-60 lakh rupees, which I’ve invested in a couple of mutual funds. Before starting my next venture, I plan to take a break. My current lifestyle requires about Rs 50,000 per month. What is the best investment product to generate periodic income until I resume earning a regular income? How does a financial planner think in that situation?
You have mentioned that you have invested the realised amount across various mutual funds but the actual allocation into equity and debt mutual funds is not known from your question so we would only be considering the corpus required to help you generate a steady periodic income.
In investment, “best investment product” is highly subjective as the outcome of investment is not known in advance, and hence, what is best in one’s case might not be the case in another. So, one should rather focus on their need or financial goals, risk appetite, and time horizon before going ahead with their investment. As you require a steady monthly income during the break period, hence liquidity, along with risk management, becomes a very important consideration.
Assuming the transition period could be anywhere between 12 and 24 months, with the current rate of monthly expense, you would require between Rs. 6 to 12 lacs over this period. So, we advise keeping around 12 lacs in highly liquid and less volatile assets during this period. By not parking the entire amount in a savings account, you can better resist the urge to spend money on unnecessary things. Also, liquid funds offer interest rates in line with or slightly higher than savings accounts at this point in time.
From this fund, you can set up a Systematic Withdrawal Plan (SWP) to withdraw Rs 50,000 per month over the next 2 years. SWPs allow you to withdraw a fixed amount from your mutual fund investments at regular intervals, such as monthly or quarterly. It is an effective strategy to generate regular income.
Although a conservative hybrid mutual fund is an option to park the money required for the next 2 years as it has an equity component embedded in it, we would not advise the same to avoid any volatility of return during this period. Instead, we advise that you park around 12 lacs in a liquid mutual fund.
Apart from the above, you should ensure you have enough emergency funds and good health insurance coverage.
- Emergency Fund
First and foremost, allocate a portion of your savings to an emergency fund. This fund should cover at least 6 to 12 months of living expenses, which in your case could be around Rs 3 to 6 lakh. This fund should be kept in a liquid, low-risk investment like a savings account or a liquid mutual fund. This ensures that you have immediate access to cash in case of any unforeseen circumstances. This should be in top of what you would require for your regular withdrawal to manage your expenses during the sabbatical.
2. Health Insurance
Buy a base health insurance policy with a minimum coverage of 5 lacs along with a super top-up policy of around 50 lacs, with the base policy cover amount as deductible. Buying health insurance this way would mean filing claims through multiple policies, but it would increase your health coverage considerably for a very low premium.
After maintaining an emergency fund and buying adequate health insurance, you can use this strategy to generate periodic income for your monthly expenses during your sabbatical.
The article is just to give you an idea on how a financial planner thinks in various situations. The views and opinions expressed in this blog are those of the author. All content provided is for informational purposes only and should not be taken as professional advice.
