Monthly Income Plans (MIPs) come under the category of Mutual Funds. They provide assured income at regular intervals. A MIP is most suitable for conservative investors and retirees. Here, the investment is directed in lower-risk securities, preferred shares, fixed-income instruments, and dividend stocks. You will receive the forwards through interest cash-flows and dividends.
So, are you ready to generate cash flow while securing the capital? We will take you through the importance of investing in Monthly Income Schemes, their benefits, types, things to keep in mind, and tax implications.
Why Should You Invest in MIP Mutual Funds?
Monthly Income Plans are best for conservative investors. It is a debt-oriented Mutual Fund. Also, it is categorized as a Hybrid Mutual Fund. A part of the money invested (15% to 32%) goes into stocks. But the majority of cash goes into debt. So, the goal is to achieve a sufficient debt-to-equity ratio to get maximum returns and regular income. The asset allocation under this Mutual Fund scheme also differs. For instance, some may invest more in equity securities, and vice-versa.
However, the investment is more in debt securities. This provides constant and maximum returns. The type of equities invested may also differ. Either the fund manager adopts a mixed approach. Or, the equity exposure is directed to small, medium, or large-sized companies.
But as the name goes, the MIP does not offer monthly income. The gains generated are distributed at decided intervals. The distribution happens usually when the market condition is good. The turbulence in the market affects the level of equity exposure. Thus, a limited amount is invested in stock holdings as their price fluctuates more often.
What Are the Benefits of Monthly Income Schemes?
Here are some of the merits of investing in MIPs:
- Withdraw Funds Anytime: MIP schemes are highly liquid compared to many other schemes. You can withdraw funds at any time to meet any emergency. There is no lock-in period.
- Open-Ended Scheme: You do not have to pay processing charges for this plan. There is no amount applicable as an entry load to invest in a particular MIP. Also, the exit load is lower than 1% of the total investment amount.
- Assured Gains: You will receive a guaranteed return every month even if the amount of the sum differs depending on the financial condition of the market.
- Fund Managers: MIPs are managed professionally by fund managers. They have a good understanding of the market conditions and investments. They conduct a timely assessment of funds and provide articulated suggestions on investments. They can guide your money better for greater income generation.
- No Upper Limit: There is no cap on the amount you can invest in the scheme. You can put money in MIP as per your requirement and capacity.
- Lower-Risk Component: The plan has a lower risk for investment. The money you invest is directed in low-risk securities such as dividend stocks, fixed-income instruments, and preferred shares.
- Greater Returns: Compared to other traditional schemes such as the Post Office Monthly Income Scheme and Fixed Deposits, MIPs offer better returns.
Monthly Income Plans and Their Types
You can either reinvest or redeem the shares. If you choose the former, then at the current NAV (Net Asset Value), you can get a greater number of fund units. However, on redeeming the stock, then you can expect inflated capital gains. Here are the types of MIPs:
Here, the fund administrator reinvests the interest earned in the funds. This inflates the AUM (Assets Under Management). So, you receive the accrued gains on maturity in lump-sum.
2. Dividend-Based MIP
These Monthly Income Plans are like share capital. Here, the fund house pays the dividends on earnings. The payment comes at regular intervals. The distribution of dividend surplus happens usually half-yearly or yearly. Or, it can follow another timeframe as well.
Things to Keep in Mind Before MIP Investment
Here are the things to consider before investing in Monthly Income Plans:
- Chalk out your long-term and short-term financial goals before you plan to put money in MIPs. This will help you understand which MIP type to go for, and when to liquidate the investments.
- Know which pay-out option you want the scheme. Do you want a lump-sum payment? Or, you wish to receive a sum at regular intervals?
- What are the tax benefits and applications on the plan?
- Decide how long you wish to invest in Monthly Income Schemes. This will give you an idea as to the period of lucrative gains.
- There is no obligation to make monthly dividend payments. The fund house can skip payments if the market is weak. Also, SEBI (Securities and Exchange Board of India) does not mandate Mutual Funds to give a guaranteed dividend or income.
- Does the particular MIP suit your financial goal and current needs?
- How much is the premium for the plan? What is its feasibility? This will assist you to compare and decide on which MIP offers you need to invest in.
- How much is your risk appetite as per your financial position when investing money in MIP?
- How much wealth is it possible to generate from the scheme? You need to keep a track of the income generation to manage your finances better.
Tax Implications on MIPs
The tax applies to a Monthly Income Plan. This is because it is a debt-oriented fund. So, long-term capital gains (LTCG) and short-term capital gains (STCG) will apply to Monthly Income Schemes. People who fall under higher tax brackets may find these funds more lucrative than those from lower tax brackets. They can save more funds on taxes.
But those who pay lower taxes may stick to the growth option than the dividend option. It helps in lowering the tax liability while earning larger returns. Here is more about the taxes levied on MIPs:
- If STCG applies, and you liquidate the investment before 3 years, the gains will show up as your income. Then the same will be taxable according to the income slab you fall in.
- But if you dispose of the held units after 3 years, then LTCG will apply at a 20% rate.
- Also, before distributing the accumulated dividend, the fund house applies 25% as the dividend distribution tax.
- But if you receive the dividends in hand, then this shall not levy tax.
Monthly Income Plans do provide assured returns. However, as an investor, you must have good knowledge about market conditions. Or, at least your fund manager must have a good understanding of the market ups and downs so that the right mix of investments is done. It is necessary to compare the offerings and their performance before opting for a MIP.