If you're looking at saving for a rainy day, and hope to have a steady stream of income when you retire, then the Monthly Income Plan might be just the ticket.
What is a Monthly Income Plan?
MIPs are hybrid investment avenues that invest a minor portion of their portfolio (around 15 %-25 %) in equities and the balance in debt and money market instruments (i.e. bonds, certificates etc). MIPs provide a monthly income to investors, but the periodicity depends upon the option you choose. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where you do not receive regular dividends, but gains in the form of capital appreciation.
However, like any other fund, the returns are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation.
With the current levels of market volatility, MIPs can be a good option considering their exposure to debt instruments. These will help you maintain a low-risk portfolio and generate regular and stable returns. Stability, rather than quick and high returns, should be the priority for a typical MIP investor.
MIPs differ from Income funds, which are launched with the objective of posting regular returns (either in the form of dividends or capital appreciation).
Is the Monthly Income Plan for you?
If you are conservative in your investments, but want to earn marginally better returns than a debt-only portfolio, then the MIP is for you. An MIP typically invests the bulk of its assets in debt, while a small equity exposure is maintained to earn something extra.
While MIPs are typically availed of by retired persons, the 'Growth' option of an MIP fits in neatly into the risk-return profile between a pure income fund and a balanced fund. This is attractive to investors like HNIs, Institutions, Trusts etc. as these investors typically do not require a regular monthly dividend inflow. However, capital appreciation with a controlled level of risk is an extremelyimportant parameter for investment. The controlled equity exposure of around 15-25% should deliver the icing on the cake over the medium term and should generate higher returns compared to a pure debt fund, albeit with a slightly higher level of risk.
MIPsare more tax efficient than FDs. Dividends declared under MIPs are tax-free. Income from bank FDs is taxable as "income from other sources" and is taxed depending on the tax bracket of the individual. Further, if the interest income exceeds Rs 5000/- in a financial year, then TDS is applicable.
To compare the returns of FDs as against MIPs (as on 31st March 08), yield on FDs of a popular PSU Bank for a 1- 3 year period were in the range of 6 % and 8.5 %p.a whereas annualized return generated by MIPs for the same period have been around 10 to 14%.
Beaware, however, that Monthly Income Plans come at their own risk than pure debt funds, because of their equity component. While they offer the opportunity to earn higher returns than possible from pure debt funds, their returns may be lower, if the equity component performs poorly.
A switch option
Hence,MIPs like other mutual fund products does not provide the security of regular dividends as they are governed by the volatility of the market. In such instances, there is a quick fix route that can be adopted in the form of Systematic Withdrawal Plan or SWP. Throught this you can opt for a growth option under the same scheme. However, surveys show that inspite of any irregularity the return excels other forms of debt investments.
Who can opt for it?
Ideally those nearing retirement could opt for MIPs as there would be an adequate steady flow if income that factors in inflation (higher real rate of interest)that combines advantages of meeting monthly expenditure as well as capital appreciation.
This product has appeal for both the conservative and the risk taking investor as it combines regular safe returns (from debt instruments)and higher returns, when the equity portion of the investment offers good returns.