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.
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.
The following are two types of MIPs, depending on how they handle returns:
Depending on the equity exposure, there are two additional types of MIPs:
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).
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:
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.
Ans: 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
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
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