Husband Turned 1 Crore Into 75000 Monthly

An investor called me last week. His wife had 1 crore and she was not working. He asked me if she can invest this in a mutual fund and generate a regular monthly income. Something like a pension or a part-time salary. Most advisors would have recommended SWP, but I suggested something very different. In today’s video, I will show you how 1 crore can generate around 75,000 to 85,000 per month and why the units never reduced. What happened during market crashes and how the income can be tax-free. Let’s open this Excel sheet. January 2023, 1 crore invested. NAV was 30.21. Units allotted was 3.31 lakhs. Now, watch this column. At the end of January, fund declared 26 paisa dividend per unit. So, 3.31 lakh units into 26 paisas, 86,000 rupees income. Next month, again dividend declared by the fund was 26 paisa. Another 86,000. Then the next month, 23 paisa was the dividend declared and the income came to roughly about 76,000 that month. A few months later, the dividend came back to 25 paisa and the income became 82,000. Notice something important. The income is not exactly fixed, but it stays broadly in a range like a salary with some variation. Now, look carefully. The corpus, which was 1 crore, went down to 97 lakhs, then 96 lakhs before regaining 1 crore. This shows while the units remained constant, the NAV fluctuates. That results in corpus being volatile in the short term. However, during this volatile period also, the monthly dividend kept coming to his bank account in this case. Second point to note. Many investors think [clears throat] this dividend is free money, but it is not. Suppose the fund declares 25 paise dividend, the next day the NAV falls by roughly 25 paise. So, if the NAV was 30.25 and the dividend declared was 25 paise, the next day the NAV will fall to 30 rupees. So, money simply moved from the fund to the bank account. Nothing magical happened. The fund value reduced, your cash in bank increased. Total wealth remains broadly the same. This is the most important thing for us to understand. However, this is only one day’s picture. Over longer periods, the stocks and bonds inside the fund continues to generate returns. And if the fund earns more than what it distributes, the NAV can gradually recover and even move higher. Like you see here. In this example, the NAV moved from 30 in 2023 to 36 in April 2026. So, while today’s dividend declaration would reduce the NAV, the future market growth can rebuild the corpus. So, the future growth is ultimately what supports sustainable income stream. Now, if you add all the dividends declared by this fund in a 12-months period of the last financial year, it was about 9,93,000. On an investment of 1 crore, that is approximately 9.9% and in this period the corpus also ended higher from 1 crore to 1.22 crores. So, there was a capital growth plus the dividend received of 9%. But remember, this is at the end of a bull market after a huge rally post COVID. If you look at a bear market, you will look at very different data. So, let’s test that strategy during a crisis. Suppose you invested 1 crore before COVID, and NAV was around 27. Then the market crashed. NAV fell to 19 rupees. 1 crore corpus temporarily became 70 lakhs. So yes, capital loss [clears throat] can happen. So this is not a fixed deposit. This is not a guaranteed income scheme. This is still market-linked investments. Now, look at what the fund house may do. If the markets are very weak, they may reduce the dividend. Sometimes there’s a possibility they can skip the payout, although normally they don’t do it. Because protecting the corpus becomes the most important thing. But when the markets recovered, the NAV recovered. From 19 rupees NAV in May 2020, the NAV reclaimed previous level of 27 by Feb 2021. The corpus also recovered to the original value of 1 crore. However, in the interim, the income continued every month even during the crash. So you might wonder why some funds can continue paying even when the markets are down. How can some funds still continue paying the dividend? Because many balanced advantage funds, aggressive hybrid funds, actively book profits during strong bull markets. Those realized profits create a reserve. As per my discussion with a few AMCs while researching for this video, some of them said they have 3 years of reserves. Some of them said they have 5 years of reserves. So when markets become volatile later, the funds can use those reserves to support income distribution, the future distribution. That is why some funds are able to maintain relatively stable payouts for extended periods of time. But remember, there is no guarantee. The fund house decides whether to declare a distribution and how much it should be. You do not have a control on it. Now, coming to the tax angle, that was the original question. Can this income be tax-free? The answer depends on the recipient’s total income and the prevailing income tax rules. For example, if a housewife has no other source of income and receives only about say 80,000 per month in a bank, her annual income would be about 9.6 lakhs. Under the current tax regime, that would potentially fall within the tax-exempt limit available today, which is 12 lakhs. However, tax laws can change and every individual situation is also very different. So, please do not treat this as a tax advice. Before implementing any strategy like this, please consult a qualified tax professional and also verify the latest rules that apply. So, do not invest in the IDCW plan only for tax reasons. Invest if your objective is to create regular income streams. So, if your goal is generating income for your spouse or say a retired parent or creating cash flows for a child, etc. or you want to convert a lump sum into a salary-like income, IDCW can be one of the possible approaches. But you must understand the concept of clubbing of income under income tax laws before taking a decision on this. But most importantly, remember three rules here. One, income is not guaranteed. Second, capital value will fluctuate. Third, dividend amount is decided by the fund house, although it is typically in the range of 5 to 8% per annum. Now, many investors may not know this point. When investing in mutual funds, you normally choose two options, growth option or IDCW option. In the growth option, no cash comes into to bank account. Everything stays inside the fund. NAV keeps growing. The IDCW option, the fund periodically distributes money to investor. So, instead of all the growth remaining inside the fund, part of it comes into your bank account. That is why you’re receiving those monthly payouts. In the growth option, if you need monthly income or monthly withdrawal, then you have to register what is called a SWP. That is systematic withdrawal plan, where you mention how much amount you want to withdraw and for how many months. That will include your own capital plus any growth applicable. In the IDCW, you do not choose, but the fund house chooses. The units remain the same in IDCW, but the NAV goes down to adjust for the dividend that was paid out. The IDCW strategy works best when markets tend to go upward over longer periods of time. In a prolonged bear market, say 2 to 3 years of falling NAV, the corpus may erode faster than it recovers. That is why the strategy is more suitable for investors with a very long time horizon of ideally say 7 to 10 years or even more. Now, some funds have an impressive history of paying dividends consistently, and they may have missed only a handful of payouts over the vast many years. But, do not confuse dividend consistency with capital protection. Whether your capital ultimately grows or stagnates or declines depends on when you entered the market and what [clears throat] happened after that, the sequence of returns that followed, and how much was being distributed along the way. In fact, a fund’s CAGR may tell you one story, while your personal investment experience can be very different. So, your story is defined by your XIRR. If you want to understand how regular withdrawals interact with market crashes and what happens to your capital, how long can it survive a prolonged bear phase, watch this video next. If you wish to receive a copy of this Excel sheet that I’ve used to calculate, please comment IDC W and I will share it in the pinned comment. IDC W stands for income distribution come withdrawal plan. It is similar to what the dividend plan was in the past, but this is very different from the dividends that you receive when you invest directly in stocks. There, the dividend is paid from the actual profit of the companies in which you invest. But in a mutual fund, when they say 25 paise every month as IDC W, it is paid irrespective of whether the fund has made profits or not. So, we discussed who this plan fits for, what kind of people should do it, but who does it not fit for? If you’re looking to compound your wealth, let’s say you’re young and you’re in the accumulation phase, the growth phase, then the growth option might be more ideal for you. So, what kind of funds should you choose to set up your IDC W? Typically, you should look at hybrid funds like say balance advantage funds, aggressive hybrid funds or multi-asset funds. The reason is it gives the liberty to fund manager to book profits during a bull market. When the market is rallying and a lot of profits are made, the fund manager typically books the profit and keeps it as a surplus. So, during long bearish phase also, they will be able to pay these dividends. So, if you look at one of the largest, oldest balance advantage fund, they have a long legacy of not having missed many dividends. It is because of this strategy of booking profits. So, do look at aggressive hybrid funds, balanced advantage funds, multi-asset funds, and do consult a certified financial advisor who can understand your risk profile and suggest funds accordingly. If you like the content of this video, please hit the like button. Please consider subscribing to this channel and sharing it with your friends.