Monthly income is increasingly becoming difficult
The need for generating monthly income from savings is high. Senior citizens, retirees require monthly income to meet their lifestyle requirements as well as for meeting various other expenses including healthcare, house maintenance etc. Others would like a monthly income to fund hobbies and other non essential expenses. However, many monthly income products such as annuities, MIPs of mutual funds, fixed income savings products etc are all either too expensive, volatile or offer very low interest rates that does not meet the monthly expenses of investors. Renting real estate is an option but it has its own challenges in the form of low rental yields and various other maintenance requirements.
There is a need for building a portfolio that generates monthly cash flows, offers low risk, is cheap and tax friendly. How do you construct this portfolio?
Easier said than done
Building a portfolio to generate monthly cash flows, low risk, low expense and tax friendly is ideal but is actually idealistic and may not be possible at all. However we can attempt to build such a portfolio through a mix of asset classes. Fixed income will provide the steady cash flows and stability to the portfolio while other assets can provide the extra earnings and tax benefits to offset the tax on interest income
Let�s take a philosophical look at the portfolio first as this will determine the portfolio objective and fundamentals.
The philosophy
Any asset that generates steady cash flows with a fair amount of future visibility is what should go into a monthly income generating portfolio. The assets that automatically go in are fixed deposits, bonds, small savings schemes of government and other fixed income products that are not risky in nature, Rentals also generate cash flows with regularity as do other assets such as toll roads, electricity distribution lines, subscription based businesses etc.
There are many business that generate steady cash flows and many of them are listed equities that have high return profiles, zero debt, regular dividend payouts and reasonable visibility of steady growth. Since these are equity assets, there is a certain amount of volatility that needs to be factored in but over a longer term, the steady returns smoothen out the volatility.
Liquidity is also a factor as there could be a need to generate cash for unforeseen requirements and assets that can be liquidated quickly should go into the portfolio.
With this philosophy in mind, lets construct a monthly income portfolio.
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