When you are looking for an avenue to invest a fixed amount of money for your short-term financial goals, then Monthly Income Plans (MIPs), which are offered by Mutual Funds, are the most-prudent choices available to you. Most people opt to invest in Fixed Deposit Accounts or Post Office Savings Schemes, but these have higher risks when compared to MIPs. An MIP is most suitable for the risk-averse investor who wants to avoid Equities and Equity-oriented investment products; an investor only prepared to take low or medium risks.
Understanding the Monthly Income Plan (MIP)
A Monthly Income Plan is a Debt Oriented Scheme. Mutual Funds invest in a mix of equity and debt, with the largest proportion of the investment going into debt; they invest in equity to debt ratios of 20:80 and 30:70. This way, they can offer investors small positions in equities thereby minimizing risk.
What this means is that the major chunk of the fund corpus goes to high interest yielding debt instruments such as Certificates of Deposits, Treasury Bills, Bonds, Commercial Paper, Government Securities etc., and the smaller chunk goes to Equity Securities such as Shares and Stocks. The larger chunk of funds is put in debt since this provides consistency, safety and stability, while the equity portion increases the returns; note that MIPs are market-dependent and the high income comes from shares and stocks.
Monthly Income Plan Options
The main aim of MIPs is to give investors regular dividend payouts, but this is not a must; dividends are subject to the amount of distributable surplus and are paid at the discretion of the particular mutual fund. Take a look at some of the MIP options available to you in India:
- MIP Dividend Option – This is also known as the Income Option and offers income as dividends. These dividends are tax-free and the fund house will deduct a Dividend Distribution Tax (DDT) of approximately 28.8%, and the investor gets the net dividend. You also have to opt for Monthly Payout or Dividend Payout.
- MIP Growth Option – In this case, the investor does not get any dividends, but gets returns when the units are sold. The Net Asset Value (NAV) is much higher than that of the MIP Dividend Option since no dividends are paid out here. This option is for the investor who does not want regular payouts.
Monthly Income Plan Categories
The percentage of funds invested in equity securities bring about two different categories of MIPs:
- MIP Aggressive Plans – These invest 15% to 30% of the fund in equity securities and offer higher returns and higher risks
- MIP Conservative Plans – These invest 10% to 20% of the fund in equities and offer lower returns and lower risks.
Here are some of the top 10 Monthly Investment Plans available today (5 Aggressive Plans and 5 Conservative Plans)
Top 5 MIP Conservative Plans in India
Birla Sunlife MIP II Savings 5 Fund
This fund invests 9% of the fund in equities. It has one of the lowest risk factors for investors and has a good income due to a reasonable expense ratio when compared to other MIP conservative plans. This is why it is said to have “below average” risk grade and an “average” return grade.
SBI Magnum MIP Floater Fund
This fund invests 13% of the fund in equities, 25% in debt securities and 61% in money market instruments. Within the last five years, it has brought about 11.2% for the last 5 years. The fund has a high expense ratio. It has a “low” risk grade and an “average” return grade.
SBI Magnum MIP Fund
This fund invests 13.6% of the fund in equity securities and 83% in debt instruments. Within the last year alone the Direct Plan Scheme has generated 14% returns, and on average has a return of about 12.67%. The fund has an “average” risk grade and an “above average” return grade.
UTI Monthly Income Scheme
This fund invests approximately 12% of the fund in equities and the rest in debt instruments. Since it was launched, it has returns of 8.56%. It has a “moderate” risk grade and a “below average” return grade.
ICICI Pru MIP Scheme
This scheme invests 13% of their funds in equity, 84% in debt securities and 3% as cash. It has an “above average” risk grade and an “average” returns grade.
Top 5 MIP Aggressive Plans in India
Birla Sunlife MIP II Wealth 25 Plan
The fund invests 30% in equities and this is why the fund performs quite well. If you want to invest your money for periods ranging from 2 to 4 years, this may be the best MIP for you. It has a “below average” risk grade and an “above average” returns grade. In the last one year, the Direct Plan generated 20.5% returns.
HDFC MIP LTP
This fund invests 24.6% of the fund in equities and 73% in debt securities. Despite the high investment in equities, it is considered to have an “average” risk grade and an “average” returns grade.
UTI MIS Advantage Plan
This fund has 24% exposure to equities and 30% in debt securities; 36% of the fund is invested in money markets. The fund has an “average” risk grade and an “average” return grade.
ICICI Prudential MIP 25 Plan
This plan invests 23.6% of the fund in equities and 73% in debt securities. The fund has a “high” risk grade and a “high” returns grade.
Kotak MIP Regular Plan
The fund invests 20% of its funds in equity securities and 70% in debt securities. It is considered to be one of the safest aggressive MIPs.
The Tax Implications of Monthly Income Plans
Since MIPs are considered to be non-equity fund, by virtue of being debt-oriented, Long Term Capital Gains (LTCG) taxes are only charged on units that are held for more than three years. Short Terms Capital Gains (STCG) taxes are charged on units held for less than three years. STCG is charged on the investor’s income and LTCG is held at 20%. Investors with the Dividend Option and getting paid dividends per month do not pay any taxes.
Some Important Titbits about Monthly Income Plans
- An MIP is one of the best investment avenues when looking for regular income
- Direct Plans give a better income than Regular Plans
- You should plan on investing for periods of 2 to 4 years for the best returns
- When dealing with short-term goals, Systematic Investment Plans (SIPs), nestled within MIPS can be created
- MIPs are dependent on prevailing interest rates, so they perform better when interest rates fall
Although there are other investment avenues, such as Fixed Maturity Plans Arbitrage Funds, Post Office Monthly Income Plans, etc., Mutual Fund Monthly Income Plans are the best for an investor who does not want to be exposed to risk; this is an investor who wants to limit exposure to stocks and shares, and still make a decent ROI.