June 07 , 2012
What is a monthly income plan (MIP)?
A monthly income plan is a hybrid mutual fund, combining debt and equity. Usually, it has about 80% debt and 20% equity in its portfolio. In rare cases, the equity component may be as much as 30%. Needless to say, an MIP is close to debt (deposits, post office schemes, etc) in its risk and return profile.
While it can be used to derive monthly income using the 'monthly dividend' option, there is nothing intrinsically 'monthly income' about it. In that sense, the name is a bit of a misnomer - other debt funds too can be used to derive monthly income; not just the MIP.
Advantages of an MIP
A monthly income plan is the ideal investment vehicle for retirees. As a retiree, you desire safety of your corpus. Yet, since you need to keep pace with inflation over the ~20 years of planned retired life, a pure debt scheme or deposit is inadequate for you. A bit of equity in your portfolio is essential to ensure that your long term returns beat inflation and maintains your purchasing power.
Bank deposits and postal savings offer higher rates for senior citizens. But they fall short for two reasons:
- They are less convenient than the MIP. Deposits rarely pay monthly income (they pay interest annually). Postal savings do, but it's a tedious process to stand in queue in crowded post offices and collect your monthly payments in cash. Further, handling this cash as a senior citizen can be unsafe
- Pure debt schemes like postal savings and deposits cannot beat inflation in the long term. Today, a 9% annual income on your Rs.30 lakh corpus (i.e. Rs 2.7 lakh annually) may sound comfortable. But five years hence, you will find the same money inadequate for your regular expenses
A monthly income plan (80% debt, 20% equity) is the ideal vehicle for you. Rather than go shopping separately for investments in debt and equity, you can get a composite in this one plan. By choosing a monthly dividend option, you can further tailor this income to come to you every month.
Limitations of MIP
A monthly income plan has almost no major limitations.
A small limitation is the capital gains tax you need to pay on the gains you make on an MIP. This is currently 10% of your gains. If you as a retiree fall in the lower income tax bracket, you may find this higher than your regular tax rate. If you fall in the higher income bracket however, tax on MIP income is lower than tax on deposits and postal savings.
Is an MIP for me?
MIP is an ideal vehicle for people who want regular, safe income. Retirees are one obvious segment with this requirement. If you have a child studying in an hostel, you might want to put away some funds that give her pocket money every month.
However, if you are younger and wanting to save / invest for the long term, you would rather avoid MIPs and go for more equity in your portfolio. Other types of mutual funds are available for this purpose.
How do I choose my MIP?
Given that the MIP is mainly into debt, you cannot go very wrong in whatever MIP you choose. Still, you would rather go for one of the more reputed fund names (HDFC, Reliance, Birla, etc) and opt for their standard Monthly Income Plan.
If you really want to go deep into analysis, you can evaluate their performance in the last three years, as also their expense ratio. But for most people, one of the standard choices above should do the job perfectly well.