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.
Read More – Best Investment Plan for Monthly Income
Introduction to 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.
How Monthly Income Plans work
Monthly Income Plans (MIPs) in India are mutual funds that aim to provide regular income and potential capital appreciation. They invest in a mix of debt and equity instruments. MIPs generate income from interest on debt holdings and distribute it to investors as dividends. The equity component offers growth potential. MIPs are actively managed, and the fund manager’s expertise plays a role in performance. Investors can choose between dividend payout or reinvestment options. MIPs have a moderate risk profile, balancing stability and market risk. Consider the fund’s objective, asset allocation, performance, and expenses when investing in MIPs.
Types of Monthly Income Plans
In India, there are two main types of Monthly Income Plans (MIPs) available to investors:
- Aggressive MIPs: Aggressive MIPs primarily invest in a combination of debt and equity instruments. They have a higher allocation towards equity, typically ranging from 10% to 25% of the portfolio. These funds aim to generate regular income through the debt component while also providing potential capital appreciation through the equity component.
- Conservative MIPs: Conservative MIPs have a higher allocation towards debt instruments, usually above 75% of the portfolio. The remaining allocation is invested in equity or equity-related instruments. These funds focus more on generating stable income and capital preservation, with limited exposure to equity for potential growth.
Best monthly income plans you should consider
Investors can consider these best monthly income plans to meet their financial goals and generate a steady monthly cash flow.
|Monthly Income Plan||Description||Suitability|
|Fixed Deposit (FD) Monthly Income Scheme||Invest a lump sum amount in an FD with a specific tenure. Earn fixed interest every month.||Risk-averse investors seeking capital preservation.|
|Systematic Withdrawal Plan (SWP)||Invest in mutual funds and set up a SWP for regular withdrawals. Opt for fixed or variable withdrawals.||Investors looking for potential capital appreciation along with steady income.|
|Senior Citizens Savings Scheme (SCSS)||Exclusively designed for senior citizens, providing guaranteed income. Fixed interest rate with a 5-year lock-in period.||Retirees seeking regular income with minimal risk.|
|Pradhan Mantri Vaya Vandana Yojana (PMVVY)||Government-backed pension scheme for senior citizens. Fixed interest rate with a tenure of 10 years.||Senior citizens looking for a pension income on a regular basis.|
|Post Office Monthly Income Scheme (POMIS)||Invest in POMIS with a 5-year tenure. Earn fixed monthly income on your investment.||Conservative investors seeking regular income and safety.|
|Corporate Fixed Deposits||Invest in FDs offered by reputed corporates for higher returns. Choose the interest payout frequency.||Investors requiring thorough research and assessing the company’s creditworthiness.|
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.
Risks associated with Monthly Income Plans
Monthly Income Plans (MIPs) in India come with certain risks that investors should be aware of. Here are the risks associated with MIPs:
- Market Risk: MIPs that have an allocation to equity instruments are exposed to market fluctuations. The value of equity holdings can be impacted by factors such as economic conditions, market sentiment, and company performance.
- Interest Rate Risk: MIPs invest in debt instruments that are sensitive to changes in interest rates. When interest rates rise, the value of existing fixed-rate bonds may decline, affecting the fund’s returns.
- Credit Risk: Debt instruments held by MIPs are subject to credit risk. There is a possibility of default or delayed payments by the issuers of the debt instruments, which can impact the fund’s income and overall returns.
- Liquidity Risk: MIPs may face liquidity challenges if there is a sudden surge in redemption requests. The fund manager may have to sell securities at unfavorable prices to meet the redemption demands, potentially affecting the fund’s returns.
- Inflation Risk: Inflation erodes the purchasing power of income generated by MIPs. If the returns fail to outpace inflation, the real value of income received may decrease over time.
- Manager Risk: The performance of MIPs depends on the expertise and decision-making of the fund manager. Inaccurate assessments or poor investment decisions by the manager can lead to underperformance.
How to choose the right Monthly Income Plan
When choosing the right Monthly Income Plan (MIP) in India:
- Define your investment objective.
- Consider the fund’s asset allocation.
- Evaluate the fund’s performance.
- Assess the expertise of the fund manager.
- Understand the associated risks.
- Compare expense ratios.
- Review the fund’s dividend payout history.
- Check the reputation of the fund house.
- Read the scheme details.
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.
Conclusion – Why Monthly Income Plans are a great investment option for risk-averse investors
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