What are the best mutual funds to generate income?
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- Updated On:03-Oct-2021
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Short Answer
Mutual funds are professionally managed investment vehicles that offer numerous categories of funds to investors. To generate regular cash flows or income, investors can use the Systematic Withdrawal Plan or invest in Dividend Payout and Debt funds to receive regular income. Debt funds provide regular interest payouts, whereas dividend payout funds give regular dividends which act as regular income.
Detailed Answer
What are Mutual Funds and Types?
Mutual Funds is a professionally managed portfolio of stocks, debt instruments, or a combination of both. These funds invest in a large number of stocks or bonds, which leads to diversification. As an individual, you get access to an extensive and diversified portfolio by paying a modest cost for the units of the fund.
There are numerous types of mutual funds out there. Each of the funds is geared towards a particular goal and asset class. There are sector funds, that invest in a particular sector of stocks or money market funds that invest primarily in bonds. Next, there are smart-beta funds, contra funds, debt funds, and many more.
The primary purpose of mutual funds is to provide numerous investment options to the average investor to choose from. You can therefore select any type of fund as per your requirement. For example, If you want to invest in the whole index, you can buy an Index Fund which tracks that particular index.
Which Mutual Funds are good for generating regular income?
Now that you have seen the various types of mutual funds, let's check which funds that can provide steady income.
If you want regular cash flows from your invested mutual funds then there are mainly three ways to do so.
1. Systematic Withdrawal Plan on Hybrid Funds
To begin with, you can follow a Systematic withdrawal Plan (SWP). Under this method, you can make regular withdrawals from your fund to receive a regular income. You can perform this in Hybrid funds or Debt mutual funds where a majority (more than 65%) of your money is invested in debt securities to give stable returns.
2. Dividend payout funds
The second method is through dividends. You can invest in regular dividend payout mutual funds. From these funds, you will receive periodic dividend payouts directly in your bank account. This is an effective way to generate income through mutual funds. Sector-oriented funds like PSU and FMCG funds can provide regular dividends and stable growth.
3. Interest from Debt Funds
The third way is through investing in debt securities or debt funds that provide regular interest payouts. By investing in debt mutual funds, you can create a regular interest income from these funds. Consuming the interest is a clever idea as the principle stays intact and continues to provide more cash flow to you.
Conclusion
These were the three methods using which you can definitely generate regular income from your mutual funds and also grow your capital at a decent rate. You can additionally use a mixture of these methods in other funds to increase efficiency. For example, you can employ the SWP method in equity funds, to generate supplemental income. Although equity funds tend to be more volatile. On the flip side, the returns are higher when compared to debt funds or hybrid funds.
It is always reasonable to diversify your money into different asset classes so that you can derive a stable income without any additional risks. For this, you can use a couple of mutual funds of separate types to add diversification and reduce market risk.
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