Monthly Income Plans: Meaning, Overview And Benefits

Mutual funds

Monthly Income Plans (MIPs) fulfil the financial requirements of investors who are looking for regular income. These medium to long-duration funds are ideal for investors looking for better returns than traditional debt instruments but do not want high exposure to equities.

The higher allocation towards debt instruments results in a more stable income. Its equity portion provides capital appreciation when stock markets perform well. Their risk is comparatively higher than pure debt funds but lesser than balanced hybrid funds.   

Now let us look into the details of these debt-oriented funds in more detail.

A Brief Overview of Monthly Income Plans

MIPs are debt-oriented hybrid mutual funds that invest primarily in fixed-income (debt) instruments. Only a small portion (around 15-25%) of such funds have allocation towards equities. Their structure usually helps to preserve capital as the debt portion covers losses in bearish markets, whereas the equity portion adds stability to the debt part in bullish markets. 

These hybrid funds offer dividend pay-outs on a monthly, quarterly or half-yearly basis and are, thus, a preferred option for steady income. These pay-outs are neither assured nor mandatory and are paid by the fund house, depending on surplus funds available from the fund’s performance.

Returns from MIPs can be volatile in comparison to debt funds, with the possibility of losses. Meanwhile, dividend pay-outs can be irregular, both in amount and frequency. You can opt for a Systematic Withdrawal Plan (SWP) to regularly redeem a predetermined amount to make up for the irregular income. 

Also Read: Dividend Yield Funds

Who Should Invest in Monthly Income Plans?

• Retirees: MIPs can be an ideal avenue of investment for semi-retired professionals and retired employees. Such investors usually have a lesser risk-taking capacity as they cannot risk losing their principal amount. The lower exposure to the stock markets makes MIPs an ideal option for such investors.
• Traditional investors: While Monthly Income Plans do not offer returns as high as equity funds, they generally tend to outperform debt funds. Investors used to traditional options such as bank and post office fixed deposits may want to look for MIPs’ higher returns with low risk. 
• Individuals in higher tax brackets: No TDS is applicable for Monthly Income Plans, unlike traditional fixed income instruments. Hence, investors in higher tax brackets can consider investing in MIPs to save taxes. 
• Conservative investors: Investors who are risk-averse can park their funds in MIPs due to their stable performance. 

Types of Monthly Income Plans

The following are two types of MIPs, depending on how they handle returns:

1. Growth-based MIPs: In this option, the fund house adds the accumulated profits to your investment corpus instead of paying it at regular intervals. Thus, instead of a steady in-flow of profits, your wealth increases over time, and you can get it upon unit redemption.
2. Dividend-based MIPs:  In this option, you can get dividends, i.e. periodic pay-outs from the mutual fund, similar to that of shares. You get to choose to get dividend pay-outs monthly, quarterly, semi-annually or annually when purchasing units of an MIP.

Depending on the equity exposure, there are two additional types of MIPs:

1. MIP aggressive plans: These MIPs have up to 30% exposure to equities and offer slightly higher returns with higher risks.
2. MIP conservative plans: These have 15% or less exposure to equities to minimise portfolio risk.

Benefits of Investing in Monthly Income Plans

• MIPs have a larger allocation towards the debt portion, which adds stability and regular income to your portfolio. 
• At the same time, the equity exposure of MIPs adds some alpha to your portfolio. Thus, MIPs combine both the stability and regular income potential of a debt fund with the alpha of equities. 
• MIPs, like any other market-linked investment, do not offer any guaranteed returns. However, their returns are more often than not higher than that of fixed deposits and MIS Schemes of the Post Office. 
• Monthly Income Plans offer more liquidity compared to bonds and FDs as they do not have a lock-in period. You can redeem the units of these hybrid funds anytime, and there are no penalties applicable for premature withdrawal (as in the case of FDs).
• These mutual funds are professionally managed by expert fund managers. With their considerable experience in the investment market, these fund managers can make more informed decisions on your investment.  
• If your portfolio has become too aggressive, you can invest in MIPs to decrease your equity exposure in a gradual and calibrated manner. 

Also Read: Commodity Mutual Funds In India

Taxability of Monthly Income Plans

Taxation on dividends

As per amendments made during Budget 2020, dividends offered by MIPs to investors are taxable. These are added to the investor’s overall income and taxed as per the applicable income tax slab. Before 2020, dividend income was tax-free for investors as the companies paid a Dividend Distribution Tax (DDT). 

Taxation on capital gains

As MIPs have less than 65% exposure to equities, they are taxed like debt funds. If the holding period (duration of investment) is less than three years, short-term capital gains (STCG) tax is applicable. For a holding period of over three years, long-term capital gains (LTCG) tax is applicable. Their taxation rules are given as follows:

• STCG: STCG is taxed in a similar manner to dividends, as they are added to your overall income and taxed as per applicable tax slab rates. In addition, you have to pay a surcharge and cess as per applicable rates. 
• LTCG: LTCG is taxed at a flat 20% rate after the benefit of indexation, regardless of the income tax slab rate of the investors. 

Final Word

Monthly Income Plans are hybrid mutual funds investing predominantly in debt instruments but also have a small allocation towards equities. They offer better liquidity and tax efficiency over other fixed income instruments. You may consider investing in these funds if you have surplus cash and are looking for a regular income.

Frequently Asked Questions

1. What are some of the factors you should consider before investing in MIPs? 

 Given are some of the factors to consider when investing in MIPs:

• Your short-term and long-term financial goals
• Your risk appetite
• The investment time horizon
• Pay-out options of the MIP
• Income tax slab rate your fall under
• Your current financial situation

2. Do Monthly Income Plans offer fixed dividend pay-outs?

No, MIPs do not offer fixed dividend pay-outs as these depend entirely on the fund’s performance and excess cash available in the investment portfolio. In a volatile market, a fund would have less surplus cash, and thus, there would be fewer or no dividend pay-outs.  

3. What do the returns of an MIP depend on?

The returns from the equity portion depend on the performance of underlying securities. In a bull market, the equity part will usually generate more returns. The returns from the debt portion will depend on the interest rates in the economy.

 4. What factors decide the risks of an MIP?

MIPs invest predominantly in fixed-income instruments such as public securities, corporate bonds and debentures which carry comparatively lower risk than equity. The risks involved with MIPs mostly depend on the equity allocation. Thus, the allocation towards large-cap, mid-cap and small-cap companies decides how risky it is.

5. What is the meaning of indexation benefit for mutual funds?

Indexation refers to the process of reducing the cost of purchase of your mutual fund units to factor in the rate of inflation. This allows you to reduce your tax outgo on LTCG earned on your debt funds.

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.