Why consider Monthly Income Plans?

Monthly Income Plan is an investment option where the investor receives a specific monthly amount that serves as a regular form of income. MIPs are offered by mutual fund houses and can be an ideal source of monthly income for retired people.

Asset allocation and investment options
In MIPs, the majority of the capital (70-75%) is allocated to debt-based securities while a quarter (20-25%) is diverted towards equity funds. In other words, MIPs can also be regarded as debt-oriented mutual funds.

The two MIP options
MIPs with Dividend Option – The income received is in the form of dividends and can be opted for on a monthly, quarterly, half-yearly or annual basis. The dividend in hand comes after the company pays dividend distribution tax to the government on these dividends. Dividend distribution tax is the tax levied by the Indian government on dividends earned by companies before these dividends are distributed to the investors.
MIPs with Growth Option - Here, an investor's capital grows within the mutual fund for redeeming in whole after a certain time period i.e. there are no dividend payouts. One can also compound in growth option so that the dividends effectively turn into capital for further dividends.

Compounding advantage
Compounding is a very effective growth tool for capital in the long term. The interest that is earned during the first year gets added to the investment amount. Because of this, the interest earned during next year is higher. For a long term investment, it can be said that the dividends accumulating on your investment every year is helping to earn higher dividends in the subsequent years.

What is important to understand is that while the risk is going to be ever present, it is inherently moderate. In times when the markets are not performing well, the fund company might not be able to declare dividends so there might be no payout every once in a while.

Balancing ratios
A very important feature of Monthly Income Plans is the periodic balancing of the equity-debt ratio based on how these components perform during a given term.
For example, let's consider that you have invested Rs. 1000/- in an MIP where Rs. 750/- is directed towards debt and the remaining Rs. 250/- is invested in equity.
Debt: Equity = 750: 250

Let's say the stock market was pretty volatile and your equity investment posts a 27% loss. At the same time, the Debt component gave a steady 9% return. Due to this, the original ratio now becomes – 817.5 : 182.5

The Fund Manager who periodically monitors your Fund will balance the allocation by moving the excess from the debt component towards equity to return to the initial (750:250) debt-equity ratio. That way, your allocation stays balanced and during a term where equity performs well and debt may see a drop, the balance can be restored again. And in instances where both the equity and debt components perform well, your asset management company may reward you in the form of a high dividend payout or allocate the same in a balanced ratio for reinvestment.

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Here are a few factors which make investment in MIP a better option:
Higher returns over a longer tenureLow-risk based asset allocationNo entry load and 1% exit load or penalty on withdrawal as compared to 2% in post office schemesWith investment periods above 1 year, tax levied long term capital gains is 10% and 20% with indexation benefitsThe most important thing to consider here is that a Monthly Income Plan is suitable not only for those who want monthly income but also for investors who prefer less risk and want to park their money for longer durations of time since the majority of the investment is made in debt instruments which carry lower risk as compared to equity. At the same time, the investor's capital also gets decent exposure to equity which can be beneficial for growth when the stock markets are in a bull run.