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Monthly Income Plan(MIP) Mutual Funds

Monthly Income Plans are a good option for risk averse investors who are looking for a higher return and more liquid alternative to Fixed Deposits. We also present a list of best MIP mutual fund schemes for 2010

Monthly Income Plan
Get Returns Higher than Fixed Deposits with Debt Funds

What is a Monthly Income Plan (MIP) mutual fund?

Primarily, MIP of mutual fund is a debt-oriented scheme that generally invests up to 75-80% of its corpus in debt instruments and the remaining in equity instruments. MIPs aim to provide investors with regular pay-outs (though dividends) - although it is not mandatory for the mutual fund scheme as dividends are paid at the discretion of the fund house and subject to availability of distributable surplus.

                                                  

Investment Objective

MIP aims to provide reasonable returns on a monthly basis through investment in debt as well as a small portion in equities. They invest predominantly in interest yielding debt instruments (commercial paper, certificate of deposits, government securities and treasury bills). The debt investments ensure stability and consistency while the equity instruments in the portfolio boost the returns. MIPs are market-linked (to the extent of their equity portfolio).

                  

Risk – Associated with debt assets in the portfolio: MIPs are affected by interest rate changes in the economy (due to majority investment in debt instruments) as explained below:

                     

When interest rates (in the economy) fall: NAV of MIPs rises (due to increase in bond prices);

                          

When interest rates rise (as in the current scenario): NAV of MIPs fall; this is when MIPs look to the equity portion in the portfolio to sustain returns.

 

(Get your lifetime free Mutual Fund account from FundsIndia and invest in MIP's)               

Equity Assets

 

Associated with equity assets in the portfolio: Since MIPs are market-linked (to the extent of their equity portfolio – which is generally 15-20%), they are less risky than balanced funds (that usually have a 60-70% exposure to equities) but riskier than pure debt funds/income funds (income funds invest only in pure debt securities). As no one can accurately forecast how the equity and debt markets will behave over any reasonable period, this raises the risk of capital erosion and non-payment of dividend for investors. Most MIP fund managers have been notorious in the past for increasing their equity exposure to up to 30% when they were bullish about the stock market. While this may boost the overall returns of the fund during a bull market, the fund NAV may take a beating during market fall.

  

An investor must evaluate the structure of the equity portfolio and invest only if the risk levels are acceptable.

          

Return: MIPs aim to provide steady returns with limited volatility. In the past 3 years, most MIPs have provided average returns in the range of 12-13%.

   

Tenure: MIPs are ideal for investment horizon of 2-3 years.

 

Taxability: MIPs being debt mutual funds, a dividend distribution tax (DDT) of 12.867% is levied.

                            

If you sell the fund units before a year and there is a gain, short-term capital gains (STCG) tax is applicable - the net gain will be added to current taxable income and tax will be levied as per your personal income tax slab. If you sell units after a year and there is a gain, a long-term capital gains (LTCG) tax is applicable - 10% tax will be levied (without indexation benefit) or 20% tax with indexation benefit, whichever is lower.

     

Who should invest?

Conservative investors who are looking for better returns than bank FDs, mutual fund MIP could be a good option. Although monthly returns cannot be guaranteed, one can bank on them for a steady income.

       

Best MIPs

Best MIP mutual funds 

Data as on Apr 26th 2010, source: ValueResearch

                                  

Alternatives to mutual fund MIPs: 

Alternatives to mutual fund MIPs are bank term deposits, post-office MIP, Fixed Maturity Plans (FMPs).

          

Conclusion -

MIPs cannot assure you uninterrupted monthly income. The monthly dividends are subject to interest rate fluctuations and even market volatility (with the increasing exposure to equities). However, mutual fund MIPs score over ‘regular-income products’ on two fronts: returns and tax efficiency.

          

They can be an investment alternative for senior citizens looking for regular income beyond fixed deposits. They are also a preferred choice for risk-averse investors wanting to enter the stock market with limited exposure.

          

However, do not depend only on MIPs of mutual funds for regular income. Instead, invest in a mix of assets to limit the loss from any one investment.

             

The author Priya Rao is a CFP Certified Financial Planner. 

                                      

Want to know if you are saving and investing wisely? Use this calculator and find out. Click here to use other such calculators.

                               

 

                                         

RELATED STORIES:

Debt Mutual Funds vs Fixed Deposits

Investing in Corporate Fixed Deposits (FD)

Including Debt in Your Financial Portfolio

                     

Useful Financial Calculators:

Monthly SIP Calculator

Retirement Planning Calculator 

Savings to Become Crorepati 

Double Your Money                                                            

 

 

                                   

 

 

InvestmentYogi : India's Leading Financial Service Providers offers detailed information on Monthly Income Plan (MIP) Mutual Funds 2010.

Published Apr 26 2010




Comments

Comments

 

Naveen Sharma said:

ya

May 6, 2010 2:27 AM
 

Naveen Sharma said:

yes i do agree

May 6, 2010 2:33 AM
 

IRSHAD said:

ARE MIPS ARE GIVING MONTHLY INCOME OR IT CAN BE RINVESTED REGULARLY (CUMULATIVE)

May 6, 2010 2:35 AM
 

HLChhabra said:

In my opinion u can not get any return through MF  /MIP,  the big  corporate sector is fooling around with investor's money because it is easy way of making money without any guarantee of returns. Each and every company has more than 8-10 fund schemes which are  launched in  regular interval. Individual investor is duped legally. It is bad on the part of regulatory to allow to play with investor's money. Similarly  some companies come out with IPO with high price  band without any base. After they get the money which is legal they start showing loss  or low profit and their  share value keeps dipping , take for example House of pearls which had no market standing it offered shares at Rs 550 ( my question to authorities is what was the basis of permitting HOPL price band of Rs 550 there should be enquiry on this) and after allotments immediately the shares started falling and today values is less than 75.   Such companies are manipulating  their documents  before issue IPO in consultation with controlling offices like SEBI. Majority of people  have lost money because of these manipulations. I would suggest not to get into such trap.Best investment is FD thru bank which is best now 8-9%

December 17, 2010 6:27 AM
 

HLChhabra said:

In my opinion u can not get any return through MF  /MIP,  the big  corporate sector is fooling around with investor's money because it is easy way of making money without any guarantee of returns. Each and every company has more than 8-10 fund schemes which are  launched in  regular interval. Individual investor is duped legally. It is bad on the part of regulatory to allow to play with investor's money. Similarly  some companies come out with IPO with high price  band without any base. After they get the money which is legal they start showing loss  or low profit and their  share value keeps dipping , take for example House of pearls which had no market standing it offered shares at Rs 550 ( my question to authorities is what was the basis of permitting HOPL price band of Rs 550 there should be enquiry on this) and after allotments immediately the shares started falling and today values is less than 75.   Such companies are manipulating  their documents  before issue IPO in consultation with controlling offices like SEBI. Majority of people  have lost money because of these manipulations. I would suggest not to get into such trap.Best investment is FD thru bank which is best now 8-9%

December 17, 2010 6:27 AM
 

afe4z said:

OG79MDARTFRSA

January 11, 2011 3:23 AM
 

subhendu chatterjee said:

In my opinion u can not get any return through MF  /MIP,  the big  corporate sector is fooling around with investor's money because it is easy way of making money without any guarantee of returns. Each and every company has more than 8-10 fund schemes which are  launched in  regular interval. Individual investor is duped legally. It is bad on the part of regulatory to allow to play with investor's money. Similarly  some companies come out with IPO with high price  band without any base. After they get the money which is legal they start showing loss  or low profit and their  share value keeps dipping , take for example House of pearls which had no market standing it offered shares at Rs 550 ( my question to authorities is what was the basis of permitting HOPL price band of Rs 550 there should be enquiry on this) and after allotments immediately the shares started falling and today values is less than 75.   Such companies are manipulating  their documents  before issue IPO in consultation with controlling offices like SEBI. Majority of people  have lost money because of these manipulations. I would suggest not to get into such trap.Best investment is FD thru bank which is best now 8-9%

January 26, 2011 6:26 AM
 

gsde said:

hdghd

January 30, 2011 1:43 AM
 

boban said:

i dont agree with you. funds should be used in the manner of social investment manner. Mutaual funds are risky, no investment which gives you a good income without risk. however i do not support mutual investment a lot. you could invest only a part of your saving for mutual fund. other part in stoke market, agina a risk and may earn more income. and othe part in saving like fD. In other terms, you save your money for investing , may be part of it for higher growth- think wisely. people who take more risk, can falls on their way, if systematically risk is taken they get a good returs.

March 19, 2011 12:35 PM
 

boban said:

i dont agree with you. funds should be used in the manner of social investment manner. Mutaual funds are risky, no investment which gives you a good income without risk. however i do not support mutual investment a lot. you could invest only a part of your saving for mutual fund. other part in stoke market, agina a risk and may earn more income. and othe part in saving like fD. In other terms, you save your money for investing , may be part of it for higher growth- think wisely. people who take more risk, can falls on their way, if systematically risk is taken they get a good returs.

March 19, 2011 12:35 PM

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