Regular income
One of the two ways an investment pays you: a steady flow of money while you hold it, such as dividends on shares and fixed interest on debt. The other way is capital appreciation.
In plain language
There are two ways an investment can make money for you.
The first is regular income: money that comes to you while you keep holding the investment. The second is capital appreciation: the value of the investment itself goes up, and you gain when you sell.
The booklet (Chapter 3) gives two examples of regular income:
- From equity: the dividend you get when you buy and hold shares of a company or units of an equity mutual fund.
- From fixed income: the fixed interest you receive on interest-bearing debt securities.
Regular income matters most to people who need money coming in, such as a retired person who no longer earns a salary.
How it works
The two forms of return (Chapter 3, "Returns from Investment"):
| Regular income | Capital appreciation | |
|---|---|---|
| What you get | Dividend or interest | Increase in value of the investment |
| When you get it | While you hold | When you sell part or all at a higher value |
| Booklet example | Dividend on shares and equity fund units; fixed interest on debt | 100 shares bought at Rs 50 and sold at Rs 65: a gain of Rs 1,500 |
The same idea appears in the three pillars of investment (safety, liquidity and return). The return pillar can be "in the form of income, appreciation of capital invested or both. Income means an investment's earnings in the form of interest or dividend payment."
In retirement (Chapter 7), pension schemes let people accumulate savings and then "get lump sum amount as regular income through annuity plan on retirement", because in old age people "don't have a regular source of income".
A caution. Debt pays fixed interest. The booklet says an equity investor "gets" dividends when holding shares, but dividends come out of the company's profits, so they are not fixed in the way interest is.
A worked example
Amounts and rates are illustrative.
Mr and Mrs Iyer of Chennai have retired with Rs 20,00,000 to invest. Their monthly household expenses are Rs 12,000.
They split the money:
| Investment | Amount | Assumed return | Yearly regular income |
|---|---|---|---|
| Debt securities with fixed interest at 7.5% | Rs 15,00,000 | Interest | Rs 1,12,500 |
| Shares of a dividend-paying company | Rs 5,00,000 | Dividend of 2% of value | Rs 10,000 |
| Total | Rs 20,00,000 | Rs 1,22,500 |
Rs 1,22,500 a year is about Rs 10,208 a month, which covers most of their Rs 12,000 expenses without selling anything.
Suppose the shares rise in value from Rs 5,00,000 to Rs 5,60,000 over three years. That Rs 60,000 is capital appreciation. They only receive it in cash if they sell. The interest and dividends, by contrast, arrived while they held on.
Why NISM asks about it
Chapter 3 (Financial Planning) sets out regular income and capital appreciation as the two forms of return from investment, and repeats "income" within the return pillar of the three pillars of investment. Chapter 7 (Pension, Retirement and Estate Planning) links pension schemes to regular income through annuity. Expect a question such as "dividend on shares is an example of which type of return?"
Common exam traps
- Dividend and interest are regular income; a gain on sale is capital appreciation. This is the classic swap.
- Regular income comes while you hold; capital appreciation is realised when you sell.
- Both equity and debt can give regular income: dividends from equity, fixed interest from debt.
- Only the debt interest is described as fixed. Dividends depend on the company's profits.
- Return can be income, appreciation, or both, according to the three pillars.
Where this is taught
- Series XIX-C · Chapter 1: Investments Landscapeintroduced here
- Series SEBI-ICE · Chapter 3: Financial Planningintroduced here
- Series XIX-E · Chapter 1: Investments Landscapeintroduced here
- Series XIX-D · Chapter 1: Investments Landscapeintroduced here
Related terms
- Capital appreciationThe gain made when the market value of an investment rises above what you paid for it — as distinct from income, which is the interest or dividend the investment pays you along the way.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- AnnuityAn insurance contract in which a corpus paid as a lump sum or in instalments buys a periodic payment from the insurer, at a rate fixed at purchase and guaranteed for life or the contracted term.
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- Tax SavingThe investment objective of choosing an investment partly to cut tax — using the deductions from taxable income, or rebates from tax payable, that the tax authorities allow.