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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.

In this article we have covered the following aspects of any MIP:

  1. What are Monthly Income Plans?
  2. Who should buy Monthly Income Plans?
  3. What are the features of Monthly Income Plans?
  4. What is the earning potential of MIPs?
  5. How do you assess MIP risks?
  6. How do you analyze MIP returns?
  7. What are the tax implications of MIPs?

1. What are Monthly Income Plans?

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.

   

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2. Who should buy Monthly Income Plans?

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.

MIP

3. What are the features of Monthly Income Plans?

a. It delivers more returns than other similar schemes such as POMIS schemes and fixed deposits in terms of returns. b. There is no limit on the investment for monthly income plans. c. You do not have to pay any entry load or any processing charges. d. The exit load on MIPs cannot exceed 1%. e. There is no lock-in period for MIPs. f. MIPs offers comparatively high liquidity. h. It is generally recommended to invest when the interest rates are high as it results in a drop in NAV.

4. What is the Earning Potential of MIPs?

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

5. How do you assess MIP risks?

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.

6. How do you analyze MIP returns?

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.

7. What are the Tax Implications of MIPs?

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.

 

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