A monthly income plan is a type of mutual fund. The objective is to preserve capital and generate cash flow by investing in a mix of debt and equity securities. As such, they provide an alternative, steady income stream to investors who need it, including retirees. This comes in dividends or interest payments.
In this article, we are going to explore what a monthly income plan is, the key features of MIP, the benefits of MIP, the types of MIP, and much more.
What is a Monthly Income Plan (MIP)?
A monthly income plan (MIP) is a type of mutual fund that invests mainly in debt and equity securities with a mandate of producing cash flows and preserving capital. MIPs are designed for investors who want to receive a regular income from their investments while taking moderate risks. It is important to note that regular income is not guaranteed as it is subject to availability of surplus funds generated by the fund manager. The aim of an MIP is to provide a steady stream of income in dividends and interest payments.
How do monthly income mutual funds work?
Now that you know the meaning of a monthly income plan in mutual funds, let’s focus on understanding how these plans work to generate returns:
How do monthly payouts occur?
When you invest in a mutual fund scheme, you can choose between two options. The first is the growth option, where the returns earned on the principal investment get reinvested to benefit from the power of compounding. The second option available is the dividend option. In theory, this dividend option offers a regular income to the investor instead of reinvesting the returns.
However, the dividend option is unreliable since dividends are paid to investors only when fund managers declare the same. Fund managers declare dividends only when the fund has accumulated a distributable surplus. Therefore, dividends may be declared and distributed only on a quarterly, bi-annual, or annual basis. In some cases, no dividends may be declared if the fund underperforms and does not accumulate a distributable surplus. Additionally, the dividends declared can vary depending on market conditions and the fund’s performance. In simple words, neither the amount nor the frequency of dividend payments are guaranteed. Therefore, financial experts often advise investors to avoid relying solely on dividend payments from mutual funds as their source of regular income.
How to use systematic withdrawal plans (SWPs) to generate monthly income?
A systematic withdrawal plan, or SWP, presents a more reliable alternative when it comes to earning regular income from your mutual fund investments. The SWP is the polar opposite of an SIP. An SIP, or systematic investment plan, allows you to invest in mutual funds through consistent periodic contributions. An SWP, on the other hand, allows you to regularly withdraw a specific sum of money from your mutual fund investments. Just like SIPs, SWPs can also be automated to ensure the withdrawn sum gets credited to your bank account at the frequency of your choosing. In other words, you can choose the amount you wish to withdraw as well as the frequency of withdrawal based on your needs and requirements.
Let’s take an example to understand how SWPs work. Suppose you are a retiree and have invested a lump-sum amount of Rs. 20 lakhs in mutual funds. To ensure a steady monthly cash flow, you set up an SWP to withdraw Rs. 10,000 on the 3rd of every month. Based on the NAV of the fund, the AMC calculates the number of MF units that must be redeemed to meet your withdrawal amount. The formula used to calculate the number of units is as follows:
Number of units to be redeemed = Withdrawal/NAV |
Let’s assume the NAV for the first month is Rs. 20 per unit. In this case, 500 units of the fund must be redeemed to meet your monthly target of Rs. 10,000. The AMC will sell 500 units to deposit the funds in your bank account. Since NAV is subject to change, the number of units to be redeemed next month will be calculated on the updated NAV.
Features of monthly income plans
Monthly income plans are investment options designed for conservative, risk-averse investors seeking a steady source of income. Let us explore their key features and benefits:
- MIPs invest around 70% to 80% of their portfolio in debt instruments such as bonds, debentures, and money market instruments, and the remaining in equity and equity-related instruments.
- MIPs offer two options to investors: Dividend and Growth. In the dividend option, investors receive periodic pay-outs from the fund, whereas in the growth option, the returns are reinvested in the fund and reflected in the net asset value (NAV).
- MIPs do not guarantee a fixed or regular income, as the dividends are declared only when the fund has distributable surplus and the NAV is above the face value. The income may also vary depending on the market conditions and the fund performance.
- MIPs are suitable for investors who have a low to moderate risk appetite and a medium to long-term investment horizon. They can provide higher returns than fixed deposits and post office monthly income schemes, but lower than pure equity funds.
Benefits of monthly income plans
Looking for a reliable income source? MIPs might be the answer. They offer several advantages for investors seeking stability:
- Regular paychecks: MIPs are designed to distribute dividends regularly, acting like a monthly salary from your investments.
- Spread the risk: MIPs invest in both debt (bonds) and equity (stocks), creating a diversified portfolio. This reduces overall risk while aiming for consistent returns.
- Focus on stability: A larger portion of MIPs goes towards debt, known for lower risk compared to stocks. This makes them a more conservative option within mutual funds.
- Tax perks: MIPs can be tax-friendly for those in higher tax brackets. There's a limit on how much tax you pay on dividends received. This translates to more money in your pocket.
Disadvantages of monthly income plans
Monthly Income Plans (MIPs) offer regular income but come with certain drawbacks:
- Volatile returns: MIPs invest in a mix of debt and equity. While debt provides stability, equity exposure makes returns susceptible to market fluctuations.
- Tax implications: Both short-term and long-term capital gains taxes apply to MIPs, potentially reducing net returns.
- Dividend fluctuations: Dividends, a source of regular income, aren't fixed and can vary based on market performance.
- Risk exposure: While lower than pure equity funds, MIPs still carry investment risks.
- Limited liquidity: Units may not be easily redeemable, especially during market downturns.
Before investing in MIPs, consider your risk tolerance and financial goals.
Types of monthly income plans
Monthly income plans are investment options designed for conservative, risk-averse investors seeking a steady source of income. Let us explore their key features and benefits:
- MIPs can be classified into two broad categories based on their equity exposure: Conservative and Aggressive.
- Conservative MIPs invest up to 15% of their portfolio in equity and equity-related instruments, while aggressive MIPs invest up to 25% or more.
- Conservative MIPs are less volatile and more stable than aggressive MIPs, but they also offer lower returns potential. Aggressive MIPs are more risky and volatile, but they can also generate higher returns in the long run.
- Investors can choose the type of MIP that suits their risk profile and return expectations.
Taxes on monthly income plans
Let us explore the tax implications of Monthly income plans:
- MIPs are taxed as debt-oriented funds, as they invest more than 65% of their portfolio in debt instruments.
- The capital gains from MIPs are taxed depending on the holding period of the investment. If the units are sold within two years of purchase, the gains are treated as short-term capital gains (STCG) and taxed at the investor’s slab rate. If the units are sold after two years of purchase, the gains are treated as long-term capital gains (LTCG) and taxed at 12.5% without indexation benefit (following the Budget 2024 announcement).
Ideal investors for monthly income plans
- Monthly income plans are best suited for investors who want to gain returns higher than they can get from other fixed-income investment sources with low risks associated with them. Retirees and people with a low-risk appetite and a lower budget fit this category well.
- MIPs are also ideal for investors who want to have some exposure to the equity markets without taking high risks. MIPs can provide the benefits of diversification, capital appreciation, and regular income.
- MIPs are also suitable for first-time mutual fund investors who want to experience the market with a low-risk investment option.
Ways to invest in monthly income plans online
Investors can invest in monthly income plans online through the following ways:
- Through online platforms, that offer various MIPs from different fund houses and allow investors to compare, select, and invest in them easily and conveniently.
- Through the websites or apps of the Asset Management Companies (AMCs) that offer the MIPs and allow investors to invest directly without any intermediaries or commissions.
- Through the websites or apps of online brokers or distributors that offer MIPs along with other mutual fund schemes and charge a nominal fee or commission for their services.
How to analyse MIP returns?
MIPs have the potential to yield greater returns compared to pure debt funds owing to their equity exposure. Historically, they have provided returns ranging from 10% to 12%, surpassing the offerings of fixed deposits. Nonetheless, dividend distributions are subject to the discretion of the fund company and are not assured.
How to choose the best monthly income mutual funds?
The process of selecting mutual funds for monthly income is not very different from the process of choosing MFs for long-term investment. The investment objective, risk tolerance, and time horizon remain the three crucial factors to consider. If you’re still unsure about how to choose mutual funds for monthly income, here’s a quick guide to help you:
- Identify your financial objectives: Setting clear goals and objectives is the first step in every sound financial plan. Understand whether you’re investing for steady income, long-term growth, or both. Think about your investment objective carefully to outline it.
- Evaluate your risk appetite: Different types of mutual funds carry different risk exposures. For instance, equity funds have a high risk exposure but also offer potentially higher returns. Debt funds are relatively low-risk options but also offer comparatively lower returns. You should choose mutual funds that align with your risk tolerance.
- Check for diversification: Diversification is the cornerstone of mutual fund investment. It can help balance your investment risks and optimise returns. Apart from investing in diverse MF schemes, look for funds that offer diversified portfolios instead of focusing on a single sector or asset. A diversified fund portfolio spreads risk to ensure potentially stable returns.
- Review the past performance of the fund: Before investing in a mutual fund scheme, remember to carefully examine the fund's historical performance. While past performance doesn’t guarantee future returns, it can still help you evaluate the fund’s returns.
- Check expense ratios: Expense ratios play an important role in your net returns over time. Consider choosing funds with low expense ratios to ensure higher returns in the long run.
- Assess distribution policies: As per SEBI’s mandate, dividends in MFs have been renamed as distribution starting 1st April 2021. As an investor looking for monthly income, you should carefully assess the distribution policies of the fund to check if the fund has clauses regarding skipping payments under specific conditions.
Best time to buy a monthly investment plan
Several factors can influence the ideal time to invest in a monthly investment plan. Below are key considerations to help you make informed decisions:
1. Market conditions:
- Favourable market sentiment: Investing during periods of positive market trends and low volatility can potentially lead to higher returns.
- Market analysis: Carefully assess market indicators such as stock prices, economic indicators, and investor sentiment to identify opportune moments for investment.
2. Financial planning:
- Regular income: A stable monthly income provides a consistent source of funds for regular investments.
- Surplus funds: Utilise excess funds to maximise investment potential and accelerate wealth growth.
- Disciplined investing: Starting investments at the beginning of the month can foster a disciplined investment habit and ensure timely contributions.
3. Investment objectives:
- Clear goals: Define your financial objectives, risk tolerance, and investment horizon.
- Tailored plans: Select a monthly investment plan that aligns with your specific goals and risk profile.
By considering these factors and adopting a strategic approach, you can optimise the timing of your monthly investments and enhance your long-term financial outcomes.
Risks involved in monthly income plans
Here is a breakdown of the potential pitfalls to consider when investing in MIPs:
- Market volatility: Do not be fooled by the "low-risk" label. MIPs are still exposed to ups and downs in both the stock and bond markets, impacting the overall value of your investment.
- Interest rate rollercoaster: Since MIPs heavily rely on debt instruments, rising interest rates can cause their value to take a tumble.
- Credit woes: There's always a chance that companies or governments issuing the debt securities in the MIP might default, meaning you could lose some of your invested money.
- Inflation erosion: Inflation can outpace the returns offered by MIPs, silently eating away at the purchasing power of your investment over time.
Recommended monthly income mutual funds to invest in India
- ICICI Pru PSU Equity Fund
- Quant Infrastructure Fund
- Quant Value Fund
- Quant Momentum Fund
- Mirae Asset NYSE FANG+ETF FoF
- Quant Multi Asset Fund
- Kotak Gold Fund
- SBI Gold Fund
- HDFC Gold Fund
- Nippon India Gold Savings Fund
Do MIPS add value for investors seeking regular income?
As an investor, you must be wondering if investing in monthly income plans actually makes sense since a regular dividend income is not guaranteed. While dividends are not technically assured, most MIPs tend to pay out regular dividends to investors to meet the existing market expectations. It is more of an unwritten principle for MIPs. So, if you are a retiree or just an investor who requires regular income, monthly income plans are prudent investment options. That said, you should avoid buying into MIPs that preach the misconception of assured returns. For stable and regular earnings, you can opt for the SWP or systematic withdrawal plan route, whereby a specific sum of money is regularly withdrawn from your investment to generate a steady cash flow.
Things to consider before investing in monthly income schemes
Before making an investment decision in a Monthly Income Plan (MIP), it's crucial to carefully consider the following factors:
1. Investment objective:
Income and capital appreciation: Assess whether a MIP aligns with your financial goals of generating regular income while preserving capital with potential growth.
2. Risk tolerance:
Risk profile: Evaluate your risk tolerance to determine if a MIP's moderate-to-low risk profile suits your investment needs.
3. Payout structure:
Income frequency and variability: Understand the specific payout structure of the MIP, including the frequency of income distribution (monthly or quarterly) and whether the payouts are fixed or variable.
4. Historical performance:
Past performance analysis: While past performance is not indicative of future results, analysing a MIP's historical track record can provide valuable insights into its performance under various market conditions.
5. Market conditions:
Economic factors: Consider prevailing economic factors such as interest rate movements and global market trends, as they can significantly impact the performance of a MIP, particularly its fixed-income component.
6. Exit load:
Redemption fees: Be aware of any applicable exit loads, which are fees charged for redeeming units before a specific holding period. Understanding these fees can help optimise your investment strategy.
Key takeaways
- A Monthly Income Plan (MIP) is a mutual fund strategy designed to provide regular income through dividends and interest payments.
- MIPs typically invest in lower-risk securities such as fixed-income instruments, preferred stocks, and dividend-paying stocks.
- MIPs are particularly suitable for investors, especially retirees, who prioritise stable income over capital appreciation.
- Investors should carefully assess their risk tolerance before investing in a MIP.
- The tax treatment of dividends from MIPs varies based on the country of issuance.
Conclusion
Monthly Income Plans (MIPs) offer investors a balanced approach to generating regular income while preserving capital. By investing in a mix of debt and equity instruments, MIPs aim to provide stable returns with lower volatility. However, it is essential for investors to assess their risk tolerance and investment objectives before considering MIPs as part of their portfolio.
After you have performed the required analysis and identified the funds you want to invest in, you can visit the Bajaj Finserv Mutual Funds Platform and start your lump sum or SIP investment. With over 1,000 funds available to choose from, you are bound to find the funds that align with your risk preferences and financial goals.
