Monthly Income Plans

  

WHAT ARE MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) belong to a hybrid fund category and are open-ended debt mutual fund schemes that invest a small portion of approximately 15% to 20% of their total corpus in equities. This means that the majority of the portfolio is invested in debt funds or/and money market instruments, which is why MIP is a moderate-risk scheme.

MONTHLY INCOME PLANS (MIP) is known by this name because its objective is to offer regular income to its investors in the form of periodic (monthly, quarterly, half-yearly) dividend payouts.

Hence, the fund manager takes short term positions on securities that are likely to declare dividends regularly. Due to this feature, investors of MIP can enjoy great liquidity while earning regular dividends.

However, it is market-linked and does not guarantee any returns or regular payouts.

Due to the presence of equity, MIPs can generate good returns but are volatile. At times, the scheme may suffer losses, making dividend payouts irregular - both in quantum and frequency.

The scheme may, at times, not pay any dividend at all. Despite all this, MIPs are known for generating decent returns after tax adjustments.

Monthly income plans (MIP) offer two options –

1. Dividend – Under the dividend option, the fund house offers regular dividends out of the distributable surplus. However, be aware that they are not guaranteed. “The name can be misleading. The scheme will declare dividends only when they have sufficient profit.

 

2. Growth – If you opt for the growth option, you won’t get regular dividends. However, the profits would add to the NAV of the scheme. This option is suitable for investors who want their corpus to grow faster.

“MIPs are best suited to retirees, housewives and people seeking some additional income or extra returns over and above their regular income.

 

 

IMPORTANT POINTS TO NOTE ABOUT MONTHLY INCOME PLANS (MIP)

The following are some of the important features of the MONTHLY INCOME PLANS (MIP) that every investor must know.

1. Investor’s profile – MONTHLY INCOME PLANS (MIP) are known for generating regular income in the form of dividends. It is best suited to senior citizens who want to park their retirement funds in a safe avenue and earn a regular income. It should be noted that though the objective of MIP is generating regular dividend income, it does not guarantee consistent income.

 

2. Risk – MONTHLY INCOME PLANS (MIP) carries minimum risk among the debt category of investment products. It invests almost 85% of its assets in debt instruments as its objective is to generate regular and steady income stream for its investors and not wealth creation.

 

3. Liquidity – MONTHLY INCOME PLANS (MIP) can be liquidated at any point in time. However, investors should check if the exit load is applicable before doing so.

 

4. Taxation – Income from MIP comes under debt taxation and hence considered as “Income from capital gains” and qualifies for indexation benefits if held for more than 36 months. However, it does not provide tax benefits.

 

5. Volatility – Volatility in the case of MIP is very low since it is an open-ended scheme and most of its assets are invested in top-rated debt schemes. Also, the returns it offers are pre-determined and indicative.

 

6. Time horizon – MONTHLY INCOME PLANS (MIP) are suitable for investors having a time horizon of 1 to 3 years or maximum up to 5 years. Beyond that is a good duration to invest in balanced funds or equity funds.

 

7. Regular Income – MONTHLY INCOME PLANS (MIP) primarily invest all its assets in debt securities to generate regular income for its investors in the form of dividends. Any dividend declared gets distributed among its investors. However, they are not guaranteed.

 

8. Returns – Since it is a market-linked product, its returns are not fixed. However, one can expect the average returns in the range of 3% to 9% depending on the quality of bonds and duration of funds. It should be noted that returns from MIP is not guaranteed.

 

9. Asset class – MIPs are considered as debt instruments.

 

10. Cost – Fund houses charge expense ratio to facilitate mutual fund investments.

 

11. Loan facility – In case of emergencies, investors can pledge their mutual funds units as collateral to avail loan facility.

 

 

WHO CAN INVEST IN MONTHLY INCOME PLANS (MIP)?

Any individual including NRI (having NRE and NRO account), firms, Trusts, Association of persons, Hindu undivided family, companies can invest.

 

 

MINIMUM AND MAXIMUM INVESTMENT ALLOWED IN MONTHLY INCOME PLANS (MIP)

One can start investing in debt funds with as low as 500/- a month. There is no upper limit.

 

 

WHERE DOES MONTHLY INCOME PLANS (MIP) INVEST YOUR MONEY?

The funds accumulated in MONTHLY INCOME PLANS (MIP) scheme are diversified across debt and equity instruments where a small portion of up to 15% is used to purchase stocks of companies and the remaining 85% is used to purchase bonds of various companies with different credit ratings and market capitalization.

Since MIPs invest heavily in the debt market, government securities, corporate bonds and deposits of various tenure issued by companies, investors get returns in the form of fixed interest however, they are not guaranteed and completely determined by the performance of the company.

 

 

WHAT KIND OF RETURNS CAN MONTHLY INCOME PLANS (MIP) GENERATE?

Assuming, you invest Rs. 10,000/- per month until retirement (60 years) @ average rate of 8% per annum, the corpus you will create (approximately) on your retirement i.e. at the age of 60 at various age groups will be as follows: 

 

Returns generated by some of the conservative balanced funds in the last 10 years

 

 

FUND ACCESSIBILITY AND LOCK-IN APPLICABLE FOR MONTHLY INCOME PLANS (MIP)

MONTHLY INCOME PLANS (MIP) are open-ended funds and are highly liquid with no lock-in. Hence, investors are free to withdraw funds as and when needed.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) offer the following benefits to its investors.

1. Diversified hence less risky – MONTHLY INCOME PLANS (MIP) offer a mix of debt and equity investments under the same roof. Hence, money invested in MIP gets diversified across both asset classes by itself thus, offering higher stability as compared to equity funds.

 

2. Better Returns with lower risk – MONTHLY INCOME PLANS (MIP) offer higher returns as compared to debt funds due to the inclusion of equity component in their overall investment portfolio. At the same time, participation in the debt market makes it less risky as compared to equity mutual funds.

 

3. No TDS – Debt oriented MIPs do not attract TDS which marginally increase their earnings. The tax is deducted only on returns it earns at the time of redemption.

 

4. Predictable Returns – Though returns in monthly income plans are completely dependent on the performance of the scheme, its returns are somewhat indicative and pre-determined due to high participation in fixed return instruments.

 

5. High liquidity – MONTHLY INCOME PLANS (MIP) are highly liquid as it is an open-ended fund and does not involve lock-in.

 

6. Risk Mitigation – By investing even a nominal amount in mutual funds, you can get exposure to several companies. So, if you have Rs 2,000 in any fund, you will be able to take exposure to various large-cap companies and lower risk of concentration.

 

7. SEBI Regulated – Mutual funds in India are regulated by SEBI, who is their governing body. They restrict fund houses with their strict rules and regulations to keep their code of conduct and ethics in place and often protect investor's interests.

 

8. Tax-efficient – If compared with other fixed return instruments like fixed deposits, it is more tax-efficient if held for more than 36 months as the returns it generates will be taxed at 20% with indexation benefit.

 

9. Create cash flow periodically – Since MIPs invest in bonds and securities that declares dividend payouts periodically, it helps individuals who require income out of their investment consistently.

 

10. Expert Advice – One of the major benefits of investing in mutual funds is that you need not worry about choosing high-quality stocks and bonds to invest in. Successful investing requires a lot of research and knowledge. You need to dig deep into the financials of a company before you invest in it. Here, the fund manager does the job for you who is well qualified, understands the market dynamics and has competency in taking strategic investment decisions.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) have the following limitations.

1. Not 100% safe – Though MIP offers a comparatively higher level of safety as compared to equity funds, it is not 100% safe as it is exposed to credit risk, interest rate risk and some amount of volatility risk as it also invests in equity markets.

In case the company they have invested money in defaults in making interest or principal payments, the NAV falls which directly impacts the value of your investment. Also, its returns are not as stable as s.

 

2. Less risky but volatile – Due to the inclusion of equity component, returns from a balanced scheme are more volatile as compared to pure debt schemes. Also, the credit risk and market-rate risk that debt components are exposed to remains.

 

3. Moderate or Low returns – Since MIPs offer predictable returns and invest most of their assets in low risk-low returns instruments, the returns it generates are also comparatively low as compared to any equity mutual funds.

 

4. Opportunity Loss – Since its exposure to equity is very low, it may lose the opportunity to earn more when the market is flourishing.

 

5. No guaranteed returns – Bonds prices are market-linked and fluctuating. Hence, despite generating moderate returns even in the long run, they are not guaranteed.

 

6. No control over the selection of bonds – Since investment decisions on the selection of bonds, which corporate to lend to etc. are taken by the fund manager, investors are left with no option to choose the investment of their choice.

 

7. Tax inefficiency for higher income group – If investors opt for dividend option, the returns they would earn may be discouraging. Investors are happy to receive dividends since they do not have to pay tax on it. However, it should be noted that the fund has to pay a dividend distribution tax of 28.84% on dividends received from debt schemes. Hence, financially it doesn’t make sense for investors in the lower income tax slab of up to 20% to opt for the dividend option in a MIP.

 

8. Regulations and restrictions – Since SEBI is a governing body of mutual funds in India, their strict rules and regulations sometimes acts as a barrier for the fund manager in taking higher risk or independent calls to exploit available opportunities in the market.

 

9. Difficulty in selecting the right plan – With the number of fund houses and options of plans that exist in the current scenario, investors are left confused with where to invest and how to choose the best plan and sometimes end up picking up the plan with very poor growth prospects. Hence, one should always take advice and use the expertise of financial advisors.

 

 

WHO SHOULD CONSIDER INVESTING IN MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) are most suited to the following investors:

1. Conservative Investor – MONTHLY INCOME PLANS (MIP) are best suited to individuals having surplus funds, who want to park it in a way where they can earn predictable returns with the least impact of market fluctuations and wants to earn more than what they get in their regular savings account.

 

2. Senior Citizens – Investors post-retirement need fixed income consistently to take care of their living expenses. Since this scheme offers regular income in the form of dividends with minimum risk, it is a safe haven and most suited option for retirees.

 

3. Investors who want to invest for a specific period – Any investor who wants to park funds temporarily for a period of 1 to 3 years.

 

4. Investors with high equity exposure – Investors with high equity exposure who are looking forward to creating a debt portfolio can have this as a very good option to diversify and create a retirement corpus.

 

5. Investors in higher tax slab – Investors who fall under the higher tax slab of 20% or more can invest in debt funds as the income earned is treated as income from capital gains and provides indexation benefit. This gives this investment an edge over a fixed deposit.

 

6. Investors nearing retirement – Due to its low-risk profile, investors nearing retirement can start transferring their equity investments to this category as it provides higher stability. Post-retirement, investors may need funds anytime soon and any market correction or fall can put their retirement planning at risk.

 

7. Investors with high liquidity requirement – MONTHLY INCOME PLANS (MIP) can generate much better post-tax returns as compared to regular savings bank account. Hence, those keeping high balance in their savings bank account can park funds here.

 

8. Investors looking for regular income – MONTHLY INCOME PLANS (MIP) are best suited to investors whose investment goal is to generate a regular income for themselves.

Since the objective of the MIP is to generate regular income for its investors, they primarily invest most of their assets in stocks that declare dividends consistently.

However, it should be noted, the dividend payout is not guaranteed and subject to many conditions and paid to its investors only as and when declared.

 

 

WHO SHOULD AVOID INVESTING IN MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) may not be the best investment for the following investors:

1. High-risk-takers – Young investors especially below 35 years of age, who have age by their side and can take higher risk to earn much better returns in equity mutual funds or direct equities.

 

2. Investors with a long time horizon – Individuals having an investment horizon of 5 years or more can invest in balanced funds or equity mutual funds as this period is long enough to take exposure to equity funds to earn better post-tax returns.

 

3. Investors with a high debt portfolio – MONTHLY INCOME PLANS (MIP) invest as much as 80% to 90% of its assets in debt instruments. Hence, investors with high exposure to debt investments should refer to the portfolio composition before investing in this option.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN MONTHLY INCOME PLANS (MIP)

MONTHLY INCOME PLANS (MIP) investors must follow the below suggestions while investing to maximize the value of their investment.

1. Perform due diligence – Never invest in mutual funds before verifying the credentials of the company and checking their credit rating. Usually, companies with low ratings try to lure investors with attractive rates. But don’t fall in the trap as they are very risky. One should thoroughly study the risks involved in such instruments.

Also, investors should be aware that though MIPs are safe and generate steady returns, they do not guarantee returns. Thus, returns it generates completely depends on the performance of the company and various macroeconomic factors.

 

2. Consider risk involved – One should always assess their risk appetite before investing in these instruments. Some debt funds take exposure to low rated companies which are considered as a high risk–high return debt investment. And someone with moderate income, sole bread earner of the family, low on savings and high on liabilities tend to have a very low-risk appetite as even a minor loss may derail their financial life. Such individuals should be very careful while investing in this avenue.

 

3. Know what you are signing up for – Scheme details and claim on returns should be verified with scheme information document at the time of investing. Investors sometimes get deceived by false claims from the agents and due to a lack of knowledge.

 

4. Compare expense ratios – “Expense Ratio” refers to the charges involved in investing in mutual funds. It also has a bearing on the overall returns the fund generates. Hence, always compare the expense ratio while investing, especially among the funds which are identical in all aspects and index funds. Hence, lower the expense ratio, higher the returns.

 

5. Know your investment goal – Knowing the investment goal is very important while selecting the investment products. MIPs invest most of its asset in debt instruments of short duration which makes it very safe, stable and most viable investment for investors with high liquidity needs and require regular income. It may not be helpful to long term investors in wealth creation due to its modest investment approach.

 

6. Returns – Investors be aware that though MIPs in a way are considered as fixed returns instruments, they do not guarantee returns. Thus, returns it generates completely depends on the performance of the company they have lent money to and various macroeconomic factors.

 

7. Track your investments annually – It is very important to revisit your investment portfolio once every 6 months or at least once a year to review its performance. Its performance should be in line with its benchmark and other funds of similar nature. In case of any deviation, a decision needs to be taken after thorough analysis, whether to stay invested or to exit and look for a better performing fund.

 

8. Always diversify – Smart investing is all about taking care of current and future financial needs. Instead of putting all the money in low risk, low return MIP to manage short term expenses, investors must diversify their investible surplus by investing some portion of it in equity mutual funds to build a retirement corpus.

 

9. Update nomination details – Updating nominee details with the respective fund houses is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN MONTHLY INCOME PLANS (MIP)

MONTHLY INCOME PLANS (MIP) investors must avoid indulging in following practices while investing to protect their investment from losing its value.

1. Selecting a fund only based on past returns – Though past performance is one of the most important determinants of fund’s credibility, it should not be the only deciding factor while picking up the investment. The glorious performance in the past can be a result of various factors that may or may not exist in the future. Hence, one should make a note of sectors the fund is exposed to, the track record of the fund manager, etc while making a decision.

 

2. Investing during increasing interest rate scenario – Monthly income plans also take exposure to bonds of various companies. Bond prices are inversely related to market interest rates. It means that the bond prices start to fall when market rates increases and vice-versa.  This happens because bonds issued at a coupon rate of 6% per annum loses its value if market rates go up to 7% per annum as new bonds are now available at a 1% higher coupon rate.

 

3. Investing in direct schemes – Though investing in direct scheme is cost-effective due to lower expense ratio, it loses the edge in the form of expert advice and services of your financial planner. Their attention and expertise in the subject can help you achieve much better returns which may surpass the savings that you may have by investing in direct schemes. As it is rightly said, sometimes, saving pennies can cost you fortune. Hence, choose a regular plan provided your portfolio is being managed by a competent financial advisor.

 

4. Getting carried away with attractive returns – Higher returns also involves higher risk. Never invest in any scheme before verifying their risk profile and portfolio composition. Usually, some schemes take very high exposure to companies with very low ratings to lure investors with attractive returns. But don’t fall in the trap as they are very risky.

 

5. Borrowing money to invest – A lot of brokers or agents will lure you with attractive returns however, one should understand the risk involved in market-linked plans. How much ever promising the investment looks, one must be very careful about fundraising methods. Never borrow money to invest in these instruments as these avenues are highly risky and there is a possibility where all your money can vanish if the investment fails.

 

6. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) investors should be mindful of the following risks involved in this investment:

1. Credit risk – Many investors expose themselves to higher credit risk by investing their money in companies with low credit ratings. They take such risky calls to earn higher interest and returns on their investment as these companies are always willing to pay more due to the weak market reputation. Many times these companies start defaulting not only in making timely interest payments, but also the principal. Hence before investing, one should always check the credit rating of the company rated by CARE, CRISIL, etc.

 

2. Interest rate risk – MONTHLY INCOME PLANS (MIP) invest in bonds of various companies which makes it vulnerable to interest rate risk. It refers to a risk where bond prices lose their value due to an increase in market interest rates. For example, a bond purchased at a coupon rate fixed at 6% will lose its value if the market rates go up to 7% and fresh bonds are available at a better rate. In such a scenario, the demand for bonds you are holding will fall as nobody would like to buy bonds offering a lower rate than current market rates. With this, the price of the bond will fall causing the NAV of the debt fund to fall as well thus denting your investment.

 

3. Inflation risk – Due to its conservative investment approach, the returns MIPs generate is still not good enough to beat inflation year on year. The average rate of inflation is around 8% per annum whereas average returns generated from fixed-income investments are less than 7% or even lesser in most cases. This may lead to shortfall when you look at the corpus you created in meeting your financial goals. Hence, it is very important to study the fund you are investing in and make your choices accordingly.

 

4. Concentration risk – MONTHLY INCOME PLANS (MIP) are also exposed to concentration risk. Certain sectoral funds or small-cap funds take heavy exposure to one particular sector or set of stocks which makes the investment very risky. The performance of such a fund in that case is largely influenced by the performance of that particular sector or set of stocks. Hence, investors should check the portfolio composition and track record of the fund manager and make an informed decision before buying the fund.

 

 

HOW TO SELECT THE BEST MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) investors must follow the below instructions before signing up for the product to ensure the safety and growth of their investment.

1. Get to the roots of the fund history – Before investing, find out as much information possible about the track record and the past performance of the fund. One should religiously study the portfolio composition of the fund. Then study the financial statements like Profit and Loss statement, cash flow statement and balance sheet along with the credit rating of the company they are investing in. The company which is low on debt and high on operating income is usually preferred.

 

2. Know about the fund manager of that particular scheme – Fund manager is the key decision-maker of any scheme and they are the ones who run the show. It is very important to learn about their background like their qualifications, past performance, work experience, expertise in their line of business, a character like whether they have indulged in any unethical activity or have any criminal charge against them, etc. Also, their financial health and investment intelligence should not be ignored.

 

3. Know what you are buying – Though returns are important, that should not be the only deciding factor. Investors should also know where the returns are coming from.

The credibility of the companies you have taken exposure to matters the most. Some low rated companies involve a high risk of volatility including the risk of principal loss. Hence, one should consider their risk appetite before investing and should not end up investing in high-risk instruments if their risk appetite is low.

Also, read its scheme information document carefully to understand the nature of the scheme and to check if its goals are in line with yours.

 

4. Study portfolio composition – When the scheme is focussed on one sector then the risk also gets concentrated on the performance of that particular sector. A slowdown in that sector can derail your overall investment. Hence, look for the fund that is evenly diversified across various companies and sectors.

 

5. Always prefer funds with a good track record – The track record of the fund is important not just from a returns point of view but also from its strong corporate governance and ethics. If the fund is found deviating from its investment goal in a few instances or has displayed poor performance consistently should be avoided.

 

6. Select technologically sound brokers – If you are investing through independent brokers then make sure they are well equipped with modern technology and systems. This will not only help you keep track of your investments online but also help you in making investments and redemptions yourself without depending on anyone.

 

7. Analyze performance – Where does the scheme stand against their competitors in terms of AUM size, market share, performance, etc.? If the scheme has been in business for a while and still fail to build sizeable AUM or generate minimum returns against its benchmark and fellow competitors in similar schemes, then the reason for underperformance should not be ignored.

 

 

TAXATION RULES FOR MONTHLY INCOME PLANS (MIP)

Since these schemes invest most of their corpus in debt, they are categorized as debt schemes for taxation.

 If investments are sold before three years, the gains would be treated as short-term capital gains. Short-term capital gains are added to income and taxed according to the income tax slab applicable to investors.

If investments are sold after three years, returns are considered as long-term capital gains and taxed at 20% with the indexation benefit.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN MONTHLY INCOME PLANS (MIP)?

MONTHLY INCOME PLANS (MIP) can be beaten by the following products on various grounds.

1. From a safety point of view – Fixed deposits and liquid funds are safer as compared to MIP as they are pure debt instruments and the returns they generate are fixed unlike MIPs. Also, they carry a relatively lower credit risk if booked with reputed banks. Fixed Deposits are however most tax-inefficient options which can further lower your post-tax returns.

 

2. From the returns point of view – Balanced funds generate better returns as their participation in equity is more.

Equity mutual funds, on the other hand, generate even better returns in the long run however it carries higher risk as well, as they invest directly in the stocks of various companies.

If someone is looking for even better returns and has a high-risk appetite then they can invest in or of various companies.

 

3. From a liquidity point of view – Some of the debt funds carry exit load which means if funds are withdrawn within a stipulated time, it may attract a penalty of 1% which may differ across fund category. Hence, someone who is expecting any major expense soon can consider investing in liquid funds or ultra short term funds which not only generates decent returns but also offer high liquidity.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED?

1. Update KYC – The first and the most important requirement is updating KYC details with the registrar. This can be done by submitting the KYC form with your PAN card and address proof to CAMS office or your investment advisor or AMC.

 

2. Create a profile with a broker or Fund House – Then the profile needs to be created by updating your details with the registered broker or a fund house to open your account.

 

3. Register Online – Once the account is opened, one needs to set up a user ID and password to register online or on mobile application and then start making transactions.

 

4. Offline Mode – One time transactions can also be executed offline by filling a form of the particular AMC and issuing a cheque. To start SIP, the investor needs to sign the SIP mandate which specifies the amount and period of investment to set up auto-debit on the account.