Monthly income plans (MIPs) of mutual funds are investment plan which gives periodic income to the investors. MIPs primarily invest in debt (75-90%) with the residual in equity. Since most of its investments are in debt instruments, they are safer and less volatile than pure equity funds and balanced funds where the equity component is more. However since their equity portfolio is market linked, they do carry equity market risk for the equity portion. Hence on a risk basis, they are slightly riskier than debt funds and fixed deposits of banks.
Does monthly income plans promises monthly income?
No. MIPs aim to provide periodic income in the form of dividend to the investors. These dividends are distributed from the surplus generated by the plan. Hence the periodicity of the dividend depends on the surplus generated. The investor needs to choose from monthly, quarterly, half-yearly and annually option for dividend payments. Alternatively the investor can opt for growth option, wherein no dividend payment will be made. The fund house does not promises monthly income but endeavors to pay it based on the option chosen.
Consistent performer
MIPs have been in existence since long and the average returns for such plans vary from 7% to 10%. However few consistent performers have able to manage more than 10% p.a. The top 5 MIP plans based on 5 years returns are as follows:
| Plan | 5 Year Returns (in % p.a.) | Fund Size (Rs. Crores)* |
| Canara Robeco MIP | 11.17 | 363 |
| Reliance MIP | 11.10 | 8,394 |
| HDFC MIP – Long Term | 11.06 | 10,100 |
| Birla Sun Life MIP II – Savings 5 Plan | 9.84 | 818 |
| L&T MIP – Regular | 9.39 | 128 |
*As of March 31, 2011
Though the returns are not guaranteed, one can look for reasonable returns from MIP over a period of time.
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Tax advantage
As compared to fixed deposits, MIPs also have tax advantage due to differential tax treatments. While interest on fixed deposit is taxable as per the tax slab one falls in, any dividend received in the hands of MIP investor is tax free. However it is subject to dividend distribution tax of 13.52% and is charged to the fund. Further at the time of sale, depending on the period of holding, it is treated as either short term capital gains or long term capital gains. If sold within a period of 12 months from the date of purchase, it is treated as short term and taxed as per the income tax slab. If sold after a period on 12 months from the date of purchase, it is treated as long term and taxed at 10.30% (without indexation benefit) or 20.60% (with indexation benefit). Thus tax treatment for MIP is favorable as compared to fixed deposits.
Suitability
MIPs are suitable for investors who are conservative and not willing to take much risk. This is achieved by limiting the exposure to equity instruments. It is also suitable for those who wants steady stream of income. Thus senior / retired citizens can find MIPs useful. Further the tax benefit makes MIPs more lucrative to investors falling under highest tax slab.
What do you like the most in MIPs? Do give your suggestions and feedback below in comments section. Thanks.
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