If you are investing to provide for a secure source of income, you will need to keep some things in mind while investing as well as redeeming your assets

The need for income from the portfolio is not restricted to retirement years. You may need income from your investments to meet goals such as children’s education, repaying a loan, or reinvesting to balance your portfolio’s asset allocation. Interest-bearing investment products such as deposits with banks, companies, bonds and debentures, income schemes sponsored by the government, and debt schemes of the mutual fund are the go-to products when income is required from an investment portfolio. You need a strategy to benefit from these investments. Here are some pointers to keep in mind.

Go long-term
One way to earn higher income from debt investments is to lock into longer-term bonds that offer a higher interest, so that your returns continues even if the interest rates fall. Make sure you have adequately provided for near-term liquidity needs and emergencies before you tie-up funds in these. The principal of a fixed-tenure bond is not paid back before maturity by the issuer and if you sell it in the secondary market before maturity, there is a possibility of capital loss. As far as possible, match the tenure of the investment to the period for which you need the income. For example, 10-year bonds could be of interest to those looking to fund their children’s education over that period, provided they don’t want to take the risk of equity.

Look Lower
Some investors may be willing to trade-off credit quality for higher interest rates. An investment in A-rated or equivalent bonds and deposits promises a higher interest compared to an AAA-rated product, to compensate for its higher risk. There are also bonds issued by public sector undertakings (PSUs), which do not have the highest credit ratings but still have a low probability of default given the government’s backing. These are some of the bonds that you could consider to earn higher returns.

For private-sector issuers, investors should assess factors such as the sustainability of earnings, debt-coverage ratio (which measures the ability to meet debt obligations), and the quality of management. Remember, ratings can change over the tenure of the bond, to reflect changes in the issuer’s ability and willingness to honour the commitments. Keep an eye on factors that may foretell such a change in the issuer’s situation. These could be: a slowing down of revenues and profitability, change in management, or increase in debt. If the level of risk goes beyond what you are willing to bear, then it could warrant a change in investments.

Stagger and Ladder
When you buy a bond, you are tied to the interest rate for its duration. However, unless you have additional investible funds, you will not be able to participate in any subsequent bond issues to take advantage of rise in interest rates. There is also the risk that the value of your existing debt portfolio will fall when interest rates in the markets rise. However, this will not matter to you if you hold the bond till maturity.

Another risk in a bond portfolio is that you may have to reinvest the maturity proceeds of a bond at lower prevailing rates. Though it is not possible to time your investments to lock-in at the peak interest rates, one way to mitigate these risks is to build a staggered or laddered portfolio of debt product. The investible corpus can be diversified into bonds of different tenures. The short-term products would mature early and free up capital for you to reinvest if rates have gone up. If interest rates fall and you have to reinvest at a lower rate, the impact on your portfolio is lower since only a small portion gets reinvested at the lower rate. The more rungs in the ladder, the greater flexibility to exploit future interest rate movements. But this also needs a greater commitment of funds to populate the ladder.

Look beyond debt products
Dividend from equity investments and rental income also constitute periodic income from investments. While dividends do not assure a return, they can give inflation-protected income that correlates to a company’s earnings.

When the objective is a regular income, choose stocks that not only have good earnings but also pay regular dividend. Mature companies with steady earnings and low growth potential are candidates to be evaluated. These companies generate cash flows but do not have opportunities to invest for growth. Dividend yields go down when prices rise and vice versa. Use this as an indicator to accumulate shares over a period of time when dividend yields go up. Rentals are another source of inflation-protected income. However, purchasing real estate requires a large fund commitment and any income earned could go towards repaying the mortgage. But once the mortgage is paid, income earned is available for other uses.

Realize appreciation of assets
Capital appreciation in assets like equity and gold can be used periodically to generate income. Set target levels for appreciation in the value of each asset class, say 15%, and sell investments when the targets are reached to realise only the profit. This conservative equity strategy helps generate income from assets like equity and gold, and is also a way to keep profits being washed away if prices decline.

The strategies adopted to generate income will vary with the age and stage of investors. A younger investor may take on credit risk to get more income from debt, while a retired one may be unwilling to tie up funds in long-term bonds to maturity. Similarly, the extent of equity used to generate income from dividends and capital appreciation will typically decline as investor ages. Taking on credit risk may be more risky when economic conditions are deteriorating. Investing in long-term bonds in a period of rising inflation and interest rates may mean that your portfolio is tied up in lower coupon bonds and losing value as interest rates in the economy rise. Inflation-adjusted income from sources such as dividend and realization of appreciation in value may become preferred options when inflation is high. Rebalance your income-portfolio strategy to reflect current economic conditions and personal preferences. Tax paid and costs incurred will reduce the income in hand. They need to be considered while evaluating the various sources of income available to investors.