Mutual Fund Investment – How to use them to make periodic payments

Mutual fund investment to make paymets

Life comes with several and varied desires and dreams, but seldom provides the financial backing to fulfill them. A Financial Planner therefore insists on a contingency or emergency fund that would cater to the normal expenses during unusual or difficult times. Often fortune smiles and with a career move, promotion or otherwise cash flows become bulky. An increment, bonus, investment payoff or windfall may be followed by a regular and planned expense or investment. Make the most of this.

Money has the happy habit of making more money. Let your money earn while you use it for the planned future deployments in investments or expenses.

Here are some of the ways in which you can use your investment to meet future expenses:

Using Liquid mutual funds: Let the money you need in the next 3 months be parked in a mutual fund liquid schemes. These earn about 7 percent annualised returns on the daily balance and will deliver returns just above inflation. The money can be redeemed almost as easily as if it were a savings bank account. Use liquid funds for your credit card, home loan EMI and other immediate needs.

The “Ultra Short-Term” fund works well for periods of 3 months to a year. Returns are normally about 1 per cent per annum more than a liquid fund, with the same liquidity. Insurance premium due later in the year and tax saving investments would be among the payments that could be parked in ultra short-term funds till needed.

Using bond funds and equity funds: Larger amounts could be set aside for expenses that would arise in future years and earn high returns during the time. Payments such as college fees, and again regular and consistent expenses for insurance premium, contributions to investments and tax saving plans such as Public Provident Fund (PPF) or withdrawals for regular expenses during retirement can be worked out in a monthly requirement. This money could be invested in bond funds and equity schemes of mutual funds to earn returns that will normally be higher than most savings plans. They also provide for low to nil taxation considering the longer tenure.

Also Read: Planning to invest in debt? Here is how to structure your exposure

Through Systematic Withdrawal: The withdrawal of the necessary monthly amounts could be made from your mutual fund investments with the simple ‘standing instruction’ called Systematic Withdrawal Plan (SWP). The SWP is a complete reversal of the SIP (Systematic Investment Plan) that you use to make regular investments. In just one instruction to your mutual fund you give instructions for a regular and fixed amount to be withdrawn from your Fund and deposited in your bank account on pre-set dates (you could also ask for withdrawal of a fixed number of mutual fund units, but this would mean a variable amount, and is therefore not recommended).

Systematic Withdrawal from your mutual fund investments in long term bond fund or equity fund investments could be used for cash flows for years. Use this even to fund your contributions to the PPF, investing Rs 12,500 a month to make up Rs 1.5 lakhs for the year. Your Life Insurance premium could also be a monthly automatic transfer from the receipts of your SWP. SWP provides the ease of getting better returns and smooth, no stress cash flows.

The author is CEO & Founder, Right Horizons

Source: Financial Express