Is it Possible to Earn Regular Income from Mutual Funds? Here’s How
Posted: Dec 06, 2018
When people talk about mutual funds, they automatically believe that they're talking about an investment option that is aimed at long-term wealth creation. As a result, most of the investors have long-term goals like retirement planning, saving for the down payment of a house, child's education or marriage.
Even people with short-term goals generally remain invested for at least 2-5 years. The common belief among the investors is that once you invest in a mutual fund, you can only get back your money with or without the profits when you redeem the mutual fund units. But wouldn’t it be great if there was a mutual fund that allowed you to earn regular income?
Fortunately, there are now mutual funds with this regular income flexibility. Let us have a look at what these funds are and how they help you earn a steady income.
What are Regular Income Plans in Mutual Funds?
Mutual funds that offer regular income option are generally hybrid funds. These can be debt-oriented or equity-oriented. Debt-oriented funds invest a major part of their portfolio in the debt market and the rest in the equity market. In the case of an equity-oriented hybrid fund, most of the portfolio is made up of equity investments and the rest is invested in the debt market.
The interest income from the debt part of the portfolio and capital appreciation of the equity investment is combined to offer regular income or dividends to the investors.
Is the Income Guaranteed?
No, there is no guarantee of the intervals at which income would be distributed among the investors. The income or dividend is only distributed if the fund has surplus funds for distribution.
This is mostly due to the presence of equity in the portfolio which can be highly volatile at times. There can be instances when the fund might be suffering from losses, and this can make the frequency and quantum of income payouts irregular.
Are Regular Income Plans Better than Growth Plans?
A common myth among a lot of new investors is that dividend option or income option is better than the growth option. However, this is not true. As soon as a fund distributes dividends or income, the same is adjusted in the NAV of the fund. This means that after the dividend is distributed, the NAV of the fund slightly falls.
Needless to say, there are no such adjustments in growth plans. As a result, compounding generally delivers better returns in case of growth option as compared to income option. However, income plans are still an excellent option for a lot of investors.
Who Should Invest in These Funds?
You can invest in regular income mutual funds if you're looking for an additional source of income. People who're retired and want to earn a monthly or steady income are also ideal candidates for such funds. Even if you're a housewife, the additional income that you can earn from these funds can be beneficial.
Apart from this, investors aiming for diversification can also consider these funds as they add equity as well as debt investment to your portfolio.
Floating rate funds aim to generate income by investing into floating rate debt and money market instruments.