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Monthly Income Plans (MIPs) are designed for pensioners or conventional investors who are risk-averse. Over 70% to 80% of the MIP corpus goes in debt funds and the remaining in stocks. However, unlike the name suggests, it is not something that delivers a fixed monthly income.
Monthly income plans fall under the hybrid mutual fund category, and they are essentially debt-oriented. Meaning, the majority of the portfolio is invested in debt and money market instruments, which is why MIP is a moderate-risk scheme.
Investors have the luxury of liquidity while having a regular inflow of dividends. However, MIPs are not something that generates a steady and fixed monthly income as the name indicates. Like any market-linked investment tool, dividends are paid out based on profits.
MIPs are ideal for those willing to have exposure to equity markets but not willing to take high risk. Majority of the MIP investors are retirees, homemakers, and those about to retire as per the data from the depositories. Basically, monthly income plans are for individuals looking to park their savings to get a regular income. Also, the first time mutual fund investors can consider MIPs as the stepping stone to experience the market.
Investors have two ways to earn dividends and growth of wealth.
| Dividend | Growth |
| The AMC pays dividends from the distributable surplus | No steady inflow of dividends |
| Dividends will be paid only when the fund is in profit | The profits get added to the NAV and let the corpus grow |
| Regular dividend declaration is not SEBI-mandated | Wealth creation with corpus growth |
A lot depends on the expertise of the asset manager as the percentage of equity allocation is at his discretion. The fund manager selects the companies (large-cap, mid-cap, small-cap or micro-cap) to invest pooled investment in, which helps to manage risks. These funds are moderate-risk bets, and they mostly invest in debt securities such as debentures, public securities, and corporate bonds.
MIPs can generate higher returns than pure debt funds due to the equity-presence. They have historically delivered 10% to 12% returns, which is more than what fixed deposits offer. However, the dividend payouts are at the discretion of the fund company, and they are not guaranteed.
As a debt-oriented fund, MIPs are taxable. All the rules of short-term capital gains (STCG) and long-term capital gains (LTCG) taxation apply on MIPs too.
For instance, if the investor disposes the units before three years, then the short-term capital gains will be added to his income and taxed as per the investors’ tax bracket. If the units are held for more than three years, then LTCG tax is applicable at 20%. However, you will be eligible for indexation benefit, and there will be no tax on the dividends in the hands of investors. The fund house pays the dividend distribution tax at the rate of 25% before distributing the dividends to the investors. Individuals falling in the higher tax bracket may consider these funds. They may gain tax-efficiency as compared to other traditional havens. Those who fall in the lower tax bracket may choose growth option over dividend option to enjoy higher returns and reduce their tax liability.
Sometimes, MIPs have served as a means to meet planned and unexpected expenses. In short, investing in MIP is an excellent means to add to your current income in a disciplined manner.
