Balance your portfolio with MIPs?

Many investors may have eroded their capital due to market’s slow grind. Investors are now seeking options on the debt side of their portfolio to protect their capital and also looking for a good rate of return. During these turbulent times, it is very sensible to be investing in equities, especially by the SIP route.

However if you are say 2 years away and you are not sure how the market will behave over the next the one type of mutual funds that is Monthly income plans (MIPs) comes into the minds of many investors as they not only promise regular returns to investors, but also give an incentive of earning higher returns, subject to the performance of equities.

MIP is the mutual fund product offered by asset management companies with the very basic objective of offering regular income to the investors (hey they do not promise, as always!). You are entitled to get returns either monthly, quarterly, half-yearly or yearly, depending on the option chosen by you. Since the basic objective of MIP is to give regular income, the firm invests the major chunk of funds (say at least 80%) into fixed income securities like commercial papers, (CPs), government securities, corporate bonds, and the like, while the remainder is invested into equities. Most of the firms invest 5%-20% into equities to obtain higher returns. You can say it is a medium risk kind of product as compared to fully debt oriented or equity oriented products.
MIPs are often confused with the debt/income funds. MIPs have the basic objective of providing monthly income to the investors; capital appreciation can be the secondary option. On the other hand, debt/income fund have the objective of providing regular income, which can be in the form of dividend or capital appreciation.
MIPs are typically designed for traditional type of investors and the ones whose objective is of regular income. It is most suitable to the investors who are near to the retirement age or the retired and senior citizens for steady flow of income at a later stage in life for meeting regular expenses. It is a good idea to invest heavily into a fund like this for say 3-4 years BEFORE retirement and then do a SWP from your age of say 60 yrs.

Choosing the right kind of MIP:

Choosing the right kind of MIP scheme plays a vital role in making your portfolio successful. The investor should choose a scheme keeping in mind his needs, requirements and circumstances. The risk taking capacity, past performance, asset allocations are some of the factors that need to be given consideration before opting for MIP.

Returns

Investors look for the monthly income in case of MIPs, as the name suggests. The returns in MIPs are given in the form of dividends. The blend of debt and equity components (generally 80:20) manages to give regular returns. Moreover, if your scheme is parking some more funds into equity component for example say 20% instead of 15%; it gives you volatility also!

Use a growth option and do a SWP after one year…this is better than taking the dividend option

Tax implications

On the tax front, in case of MIPs you get tax benefits as the dividend received is tax free; the fund house pays the dividend distribution tax (DDT).

A word of advice:
If you are a risk-averse investor, you can add MIP schemes into your portfolio, as at least 80% of funds are parked into debt component. So not only are you assured of regular returns, but you may also earn higher returns, if the equity component of your MIP performs well.

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  1. Subra,

    Why you are recommending MIP in place of SCSS and the FD which offer better compared to MIP’s even though they are 100% Debt product

    Regards
    Krishna

  2. Subra,

    After the fund pays Dividend Distribution Tax, the returns will be lower than a pure debt fund with SWP.

    Why would people prefer MIP’s over a pure debt fund?

    Equity exposure can also be taken by investing in a balanced fund or pure equity fund to the extent of one’s risk apetite. There are also other ways like Senior Citizens saving Scheme and PPF.

    I think the term Monthly Income Plan must be attracting retirees who are used to a regular salary in their working life. SWP’s can do the same job. SWP’s can be done in all types of funds i believe.

    Regards

  3. Putting money in MIP does not make any sense. There is no security and no long term growth. My opinion.

  4. Subra,
    Very nice article on MIPs. I would also like to add upon another tax impact – DDT deducted by MF house is actually around 15%. Hence, even though the dividend is tax free in the hands of the investor, it is pretaxed. If you are an investor who has income less than 2lac, it would be much wiser to go for the Systematic Withdrawal method so that your income from MIP is taxed as a Capital Gain which is exempt upto the limit of Rs. 2lac (Normal Income + CG).

    What is your opinion on this ?

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