How Can I Create Multiple Sources Of Income In India?

Aug 02, 2018 10:15 IST 3421 views

The legendary investor, Warren Buffett rightly said that if you cannot create a second source of income by the age of 45, then you have really done injustice to yourself. If you are in business or if you are an independent consultant there are multiple streams that you can consider. But what if you are employed and your existing contract does not allow you to take up other work? Also, your pressures at your workplace may be tight enough to leave you with little spare time to worry about how to create a second stream of income. That is when you have to make money work hard for you. Let us look at two such approaches.

Focusing On High Dividend Stocks By Creating A Corpus

Let us start by creating a corpus to invest your money. Let us say you are 25 years of age and earning Rs.75,000 per month after completing your MBA. You can save Rs.10,000 per month in an equity fund as you have other commitments with the rest of the money. But starting off with Rs.10,000 per month in an equity fund SIP is not bad enough. Here is why.

Monthly SIP

Tenure of SIP

Average Yield

Extent of risk

Rs.10,000

20 years

14.50%

Medium to high risk

Amount Invested

Value at age of 45

Wealth Ratio

 

Rs.24 lakhs

Rs.1.41 crore

5.88 times

 

As the table above suggests, you have created wealth to the tune of 5.88 times your original principal invested. But more importantly, you have a ready corpus of Rs.1.41 crore available with you at the age of 45. What happens if you invest this money in high dividend yield stocks? Let us look at some possibilities…

High DY Stock

Dividend Yield (%)

Indicative Annual Return

Equivalent monthly earnings

SJVN

8.16%

Rs.11,50,560

Rs.95,880 pm

Coal  India

7.85%

Rs.11,06,850

Rs.92,238 pm

NLC India

6.75%

Rs.9,51,750

Rs.79,313 pm

As can be seen from the above table, from the age of 45 onwards you are able to create a big source of additional income by just planning and investing Rs10,000 per month in equity SIP today. That is how simple it is to create a regular stream income by planning early. Of course, we do not know which stocks will give high dividend yields at that point in time so we have considered the quality high dividend stocks at this point in time. Above all, this approach is also tax efficient as you only have to pay 10% tax on dividends above Rs.1 million in a fiscal year.

Creating A SIP And Then Paying Yourself Through An SWP

This is another way of ensuring regular income for a period of time. Let us say, you are uncomfortable with the idea of investing in high dividend yield stocks as they generally do not give price appreciation. Also, there is no assurance on dividend yields as dividends may fall if the profits of the company fall. Another way out is to invest the money into a debt fund and pay yourself through an SWP. Let us assume that you did the same SIP and ended up with Rs.1.41 crore at the age of 45. Now you want to pay yourself a regular income for a period of 15 years till your retirement. Here is how it will work.

Year

Opening Balance

Yield on Debt Fund @ 9.75%

Value of Fund

Annual Withdrawal

Closing Balance

1

141,00,000

13,74,750

154,74,750

18,27,000

136,47,750

2

136,47,750

13,30,656

149,78,406

18,27,000

131,51,406

3

131,51,406

12,82,262

144,33,668

18,27,000

126,06,668

4

126,06,668

12,29,150

138,35,818

18,27,000

120,08,818

5

120,08,818

11,70,860

131,79,678

18,27,000

113,52,678

6

113,52,678

11,06,886

124,59,564

18,27,000

106,32,564

7

106,32,564

10,36,675

116,69,239

18,27,000

98,42,239

8

98,42,239

9,59,618

108,01,857

18,27,000

89,74,857

9

89,74,857

8,75,049

98,49,905

18,27,000

80,22,905

10

80,22,905

7,82,233

88,05,139

18,27,000

69,78,139

11

69,78,139

6,80,369

76,58,507

18,27,000

58,31,507

12

58,31,507

5,68,572

64,00,079

18,27,000

45,73,079

13

45,73,079

4,45,875

50,18,954

18,27,000

31,91,954

14

31,91,954

3,11,216

35,03,170

18,27,000

16,76,170

15

16,76,170

1,63,427

18,39,596

18,27,000

12,596

As can be seen from the above table, the corpus of Rs1.41 crore has been invested in a debt fund that conservatively yields around 9.75% per annum. So the idle money earns debt fund yields while a portion of the corpus is withdrawn each month for a period of 15 years till the age of 60. For simplicity, we have considered annual periods but the annual SWP of Rs.18,27,000 will translate into monthly income of around Rs1,52,250. Additionally, since the withdrawal is structured as an SWP, the capital gains tax will only apply on the return portion and not on the principal portion which makes this method a lot more popular and tax efficient.

The moral of the story is that to create regular income, you do not need to look too far. Your own monthly SIP can be used to create multiple streams of income for yourself. Of course, the earlier you start, the better off you will be.

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