If you are an investor who is looking to earn higher returns while also maintaining lesser exposure to risk, you must consider investing in a Monthly Income Plan (MIP). Read this article to know everything about these hybrid mutual fund schemes including their asset allocation and how they are taxed.
How do Monthly Income Plans work?
A Monthly Income Plan (MIP) helps investors earn a regular income – on a monthly, yearly, or quarterly basis – through dividend pay-outs. It is a hybrid mutual fundscheme which invests in a combination of debt-oriented and equity-oriented securities. However, their investment in equity mutual funds is limited to 15-25%. They invest the remaining percentage of capital in debt-oriented securities. Investors must note that the dividends that they receive through Monthly Income Plan investments are not assured. Furthermore, the returns offered by these funds – because of the exposure of MIPs to equity-oriented securities – are volatile which can result in dividend pay-outs being irregular.
What are the features of Monthly Income Plans?
Here are the key features of MIPs in mutual funds:
- MIPs invest in equity and debt instruments: Monthly Income Plans invest around 15-25% of their income in equity stocks and the remaining 75-85% in debt mutual funds, allowing investors to benefit from higher returns and a relatively lower risk.
- Investors can choose from two modes of investing in an MIP: The Growth option does not offer a regular income to investors, whereas the Income option helps them receive regular dividend payouts.
- MIPs allow investors to choose the equity weightage of their MIP investment: Investors can choose the equity weightage of their MIP investment. The MIP Aggressive plan offers 30% exposure to equity stocks, and the MIP Conservative plan offers less than 15% exposure to equities.
- MIPs offer higher returns as compared to FDs, but also pose a higher risk: In a one-to-three-year-long tenure, MIPs offer higher returns as compared to Fixed Deposits (FDs). However, the pose a higher risk due to the equity component.
- The government taxes these funds like other debt mutual funds: The dividends earned through MIPs are taxed like other debt mutual fund capital gains. The short-term capital gains (held for less than 3 years) are taxed according to the investor’s income tax slab rate. The long-term capital gains (held for more than 3 years) are taxed at 20% with indexation benefit.
Points to keep in mind before investing in Monthly Income Plans:
- Dividend pay-outs are not fixed: Unlike FDs, MIPs do not guarantee returns through dividends. If the Reserve Bank of India (RBI) reduces the interest rate, for example, even the debt component of an MIP might yield lesser returns.
- MIPs also charge an exit load fee: Most MIPs charge an exit load fee of 1% if the mutual fund units are redeemed a year before investing in the fund.
- Dividend pay-outs are taxed: If the investment amount is less than ₹ 10 lakh, the investor must bear a Dividend Distribution Tax (DDT) of 15%.
Investors who wish to invest in a Monthly Income Plan must use an SIP investment calculator to calculate their mutual fund returns in advance. Using an SIP return calculator can help them plan for their mutual fund investment in advance.