What do you understand by investment from income? It is that money that you tend to withdraw on a regular basis from your investment so that you can meet your living expenses. Normally, retired people prefer this type of income because they do not have access to any source of regular income.
When you invest for the purpose of income instead of saving, its features differ as compared to the investments that you make for wealth-growth purposes. The first thing that you need to take care of is that the investment has to be predictable in nature. When you are accumulating money for use at a later stage, then it does not really matter if there are some ups and downs in the returns at different times. You need not worry even if there is some loss during the initial periods. Just make sure that in the long run, the gains that you make, cover up the losses of your initial days. But you need to always keep in mind that if you are investing for the purpose of withdrawals, then this unevenness will definitely be harmful.
The next thing that an investor needs to keep in mind is that the predictable rate of return needs to match the inflation rate. If by chance, there is a mismatch between the two, then there is a gradual downfall in the value of your money even when you are not actively utilizing them.
Another significant thing is that your investment should be liquid in nature. Let us explain what we mean by liquidity. An investment that is liquid in nature will not have a long lock-in period. You will be able to withdraw it on a regular basis. During those withdrawals, you will not incur any kind of financial penalty.
It is true that not many investment avenues will be there to meet all these criteria. Savers who do not have adequate knowledge normally use a bank savings account. A savings account will be helpful only in specific cases. Yes, bank savings account are predictable as well as safe. They are also highly liquid in nature. The truth is that they are the second most liquid asset, after the cash in your pocket.
But the interest rate that you get on them is exceptionally low. At present, most of the banks provide a 4% rate of interest. Only a few newer banks offer a bit higher interest rates. A saver can find these rate of interest attractive since savings bank account used to pay less than these a few years back. But they do not match the rate of inflation at all. The money of a saver keeps on losing its value, and with time, it will be able to buy a lesser amount of things.
The second most popular choice after the savings bank account is the fixed deposits of a bank. They definitely offer a higher rate of returns as compared to the savings account. You will get around 5 to 7 % of the interest in fixed deposits. You can also rest assured that these fixed deposits are absolutely predictable and safe in nature, just like the savings account.
But when it comes to liquidity, they cannot score well. If you want to have regular income from fixed deposits, then you have to set up a complicated FD roster that keeps on maturing every month. Another option that a saver can utilize is to transfer the amount of money of the matured FD to his savings account. Then he can use that money for monthly withdrawal purposes. But both the options are not at all practical.
So, here we are left with the debt funds as the best alternative. Debt funds are not vulnerable to any of the above-mentioned flaws. A saver can use short-duration debt funds for this purpose. They can be assured of the predictability of these debt funds.
Also, we have to mention that debt funds are incredibly liquid in nature. A saver can withdraw his money even at one day’s notice. You will be glad to know that the returns are higher as compared to fixed deposits in a bank. If your investment is intact for more than one year, then you will be able to earn as much as one and a half times more than your fixed deposits.
If you go through all the above-mentioned factors, you will realize that debt funds are indeed the best option for earning a regular income from your investment.