Using Mutual Fund SIPs as your second source of Income - Motilal Oswal
Using Mutual Fund SIPs as your second source of Income - Motilal Oswal

Using Mutual fund SIPs as your second source of income

We all know the power of systematic investment planning (SIP) and how the SIP mutual fund builds wealth in the long run. SIP as an investment in India has proved itself when it is done on equity funds. But did you know that SIP can actually be used as a means of creating a second source of income. Your income level really does not matter. What matters is that you are willing to save the maximum you can and make your money work really hard. That is what really matter in the final analysis. Here is the best SIP investment plan 2018 and how you can actually use SIP to create a second source of income.


Take the case of Naresh Pathak, an SIP investor

Naresh Pathak had realized the merits of an equity mutual fund SIP early on in his career. He realized that in his 35 year career, if he could spend close to 15 years saving aggressively, then he would not only end up creating wealth for his family but also be able to create a dedicated source of additional income for himself. Here is where Naresh Pathak stands currently:


ParticularsAmountParticularsAmountMonthly IncomeRs.1,05,000Investment PotentialRs.10,000 per monthMonthly expensesRs.45,000Annual Step up SIPRs.5,000 per monthMonthly EMIsRs.40,000Current Age30 yearsEmergency FundRs.10,000Interim Review Age45 yearsSaving PotentialRs.10,000Final Review Age60 years


Naresh currently pays EMI for his home and for his car. With the balance of Rs.10,000 he is in a position to create equity fund SIP. This is how the SIP will work. We need to break up the SIP into 2 parts. In the first part, he will do a stepped up SIP starting at Rs.10,000 per month and then annually increase it by Rs.5,000 per month for 15 years. At the age of 45 years, He will split the corpus so created into 2 equal parts. One part will continue as his wealth creating SIP at Rs.20,000 per month and the other half will be used for his second source of income. Here is how it will actually work


Part A- How the Step up SIP compounds for 15 years till the age of 45Monthly SIPRs.10,000Total Amount InvestedRs.81,00,000Annual Step UpRs.5,000Value of SIPRs.2.02 croreTenure of SIP15 YearsWealth Ratio2.50 timesAnnual Yield on SIP15%


In your first review period of 15 years, Naresh has invested a total amount of Rs.81 lakhs via his stepped-up SIP and that final value at the end of 15 years is worth Rs.2.02 crore yield a wealth ratio of 2.50 times. Now come the splitting of the wealth creation part and the regular income part. What Naresh will do is to allocate Rs.1.01 crore back into the fund and continue with a monthly SIP of just Rs.20,000 per month. The other Rs.1.01 crore will be used to create a systematic withdrawal plan for 15 years till his retirement as a second source of income. Let us first look at how his wealth will continue to grow till the age of 60.


Fixed Lump-sumAmountMonthly SIPAmountCurrent CorpusRs.1.01 croreMonthly ContributionRs.20,000Invested inEquity FundCAGR Yield15%Annual CAGR yield15%Tenure15 yearsCorpus after 15 yearsRs.8.28 croreSIP value at Age 60Rs.1.35 croreThis will leave Naresh Pathak with an invest corpus of Rs.9.63 crore at the time of retirement

Let us turn back to how the second portion of the step-up SIP of Rs.1.01 crore will be used to create regular income from the age of 45 till the age of 60. That will be done through a systematic withdrawal plan. The amount of Rs.1.01 crore will be invested in a liquid fund and will be structured to be fully drawn down by age of 60. Check the table below.

The corpus of Rs.1.01 crore will be invested in a liquid fund yielding 6% annualized so that there is no risk and it is almost assured income for you. You can actually generate an additional annual income of Rs.10,39,800 per annum for the next 15 years which works out to an additional monthly income of Rs.86,650 per month. This is how you create second source of income to supplement your regular income through the power of SIPs.


Key takeaways from the regular income via SIPs argument
If you look at this approach closely, nothing is compromised. Naresh is still left with a retirement corpus of Rs.9.63 crore and he has still been able to generate an additional monthly income of Rs.86,650 per month between the age of 45 and 60. That is the power of starting your SIP early, using it intelligently and actually using the SIP to hit two birds with one stone. It can veritably generate second source of income for you!

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