Investors have a multitude of investment options to choose currently based on many factors like their returns expectation, risk appetite, cost of investment, investment objective, etc. These factors are responsible for the investor shaping their investment portfolio and meeting their long-term investment goals.
One of the main factors mentioned above is the return expectation. If the investor is a risk-averse person and is looking for fixed monthly income, the monthly income plans (MIPs) of mutual funds seem to be ideal for such investors. They are considered a better option than traditional fixed-income investments like fixed deposits, Post Office Monthly Income Scheme, Government Bonds, Senior Citizen Savings Scheme, etc. These plans provide the benefit of regular monthly income and are also of low risk.
What are Monthly Income Plans?
Monthly Income Plans are essentially debt-oriented funds where the majority of investment is in debt instruments and a smaller portion in equity and equity instruments. Investment is done in government bonds or corporate bonds or other instruments of similar nature. The income from such instruments can be generated in the form of interest and dividends. Such income can be considered as an alternate source of income for the investors.
These monthly income plans have instruments of different maturity dates as well as different risk profiles. The ideal monthly income plans come with a focus on having the right combination of returns and risk. Also, the funds may have varied investments in large-cap stocks, mid-cap stocks, or small-cap stocks depending on fund profile.
Monthly income plans are broadly categorized as dividend-oriented monthly investment plans and growth oriented monthly income plans.
- Under the dividend-oriented plan, the earnings are generated in the form of dividends while
- In growth-oriented plans, the earnings accrued are reinvested in the fund which eventually generates a higher corpus for the investors.
Who should invest in MIPs?
Monthly income plans are best suited for investors who are seeking to gain returns higher than other fixed-income investment sources (like those mentioned above) with low risks associated with them.
The target investors for these plans are retirees or people having a low-risk appetite as well as a lower investment budget. It can provide them with a steady source of income and also a safety net against unfortunate circumstances.
What are the benefits of MIP?
Monthly income plans have many benefits for the investors. Some of such benefits are discussed below.
The risk of investment is quite lower in monthly income plans as the major component of the fund is debt instruments. This reduces the risk for the investors as compared to equity oriented funds.
Monthly income plans have a lower expense ratio as compared to most actively managed funds. This is on account of a fixed proportion of the debt and stocks so the fund managers have relatively less burden to manage the fund.
Diversification is the inherent feature of any mutual fund. The mix of debt and stocks further increases the benefit of diversification.
Monthly income plans provide the investors with higher returns as compared to traditional investment measures like fixed deposits, post office schemes, government bonds or securities, etc. The historical data has also shown that monthly income plans have provided higher returns than pure debt funds.
Hedge against inflation
Inflation eventually leads to a reduction in the returns of the investors over a period of time. Monthly income plans have an edge over other debt funds as they can be used as a hedge against inflation. The returns on the monthly income plan can beat inflation with the help of the equity component of the fund.
Better liquidity than traditional fixed income plans
These funds are also considerably liquid as compared to the traditional fixed-income investments that mostly come with a minimum lock-in period.
Taxability on MIPs
As MIPs primarily invest in debt, the tax treatment on Monthly Income Plans is in line with debt mutual funds.
- If the investment is sold within 3 years, any gain is considered as Short Term Capital gain and taxed according to your Income-tax slab.
- If the investment is held for more than 3 years, the gains are taxed at 20%, but you benefit from indexation here. This helps in bringing down your overall tax outgo.
What is the difference between MIP and SWP?
While monthly income plans allow the investor to withdraw a fixed amount from the fund each month, systematic withdrawal plan (SWP) allows the investor to withdraw a fixed portion of the fund on a set date. The investor can choose the amount for withdrawal depending on their needs or can also withdraw only the portion that has appreciated in the fund for a particular month. The capital portion of the fund can remain intact especially in larger investments by withdrawing through SWP even if the monthly returns may be uneven. SWP in lower investments can drain the capital investment of the investor.
Monthly income plans have the benefit of fixed returns as well as a capital appreciation for the investors. These funds can be a huge help to investors in their mature stage of life when a steady source of income can be a good means to meet their daily expenses.
FAQs on Monthly Income Plans
1. Is the expense ratio of monthly income plans higher?
Yes. Monthly income plans belong to the mutual fund family which are actively managed funds. Hence, the expense ratio is relatively higher.
2. Can a person invest in multiple monthly income plans simultaneously?
Yes. There is no restriction on the number of investments held by the investor or the amount to be invested.
3. What are some examples of monthly income plans?
Some examples of the monthly income plans are mentioned below.
- UTI Regular Savings Fund
- SBI Debt Hybrid Fund
- ICICI Prudential Regular Savings Fund
- IDFC Regular Savings Fund