Monthly Income Plans: New flavour of the season!

In the current economic cycle, it is highly likely that the interest rates could tend to fall and that will in turn mean that bond prices will start to increase. This scenario is well positioned for Monthly income plans {MIPs} (which invest almost 75%- 90% in debt instrument) to deliver impressive returns as the interest rates are expected to moderate going forward.

Monthly Income Plans are a good option for risk averse investors who are looking for a higher return and a more liquid alternative to Fixed Deposits. MIPs are lesser known avenues within the broad debt ambit but could be an ideal option for investors who are looking for good returns with moderate risk.

Monthly Income plans

These are open-ended schemes that invest a majority of their assets in fixed income instruments and a small allocation to equity and equity-related instruments. This category of fund aims to provide a regular income to the investor. An MIP typically invests the bulk of its assets in debt, while a small equity exposure is maintained to earn something extra. Generally, the equity allocation is capped between 10% and 25% of the total assets. This option is open for those investors’ who are looking at regular and steady income and still want to dabble a bit in equities.

Monthly Income plans offer options of monthly and quarterly income. Neither the frequency nor the volume of the dividend is guaranteed. The investments made by these schemes bear market or interest rate risks and move with their respective benchmarks; at times, when the markets remain volatile with a downward bias, the fund manager may even choose to skip the monthly dividend. With the fixed income component dominating, these plans do not suffer much on the downside.

Like all other mutual funds, MIPs too come with the Growth & Dividend (Payout and Re-investment) option. The 'Growth' option of an MIP is ideal for a ‘Moderate’ risk profile, since it typically falls between a pure income fund and a balanced fund. It is a viable option for HNIs, Institutions, Trusts etc. as these investors typically do not require a regular monthly dividend inflow, but still would offer capital appreciation at controlled risk levels.

The other option of Dividends will offer regular payouts which will essentially assume the form of a monthly income. Dividends declared under MIPs are tax-free and therefore MIPs are more tax efficient than FDs. Income from bank FDs is taxable as "income from other sources" and is taxed depending on the tax bracket of the individual.

If you sell the fund units before a year and there is a gain, short-term capital gains (STCG) tax is applicable - the net gain will be added to current taxable income and tax will be levied as per normal tax rates. If you sell units after a year and there is a gain, a long-term capital gains (LTCG) tax is applicable - 10% tax will be levied (without indexation benefit) or 20% tax with indexation benefit, whichever is lower.

Returns

It is important to evaluate the fund before investing; one also needs to compare across Monthly income plans which have the same equity exposure. In the below case, Birla SL MIP has ~24% equity exposure while Magnum MIP has ~19% equity exposure and hence, the returns can vary starkly.

 
Risk Analysis

Risk – Associated with debt assets in the portfolio: MIPs are affected by interest rate changes in the economy as explained below:               

When interest rates (in the economy) fall: NAV of MIPs rises (due to increase in bond prices);
When interest rates rise (as in the current scenario): NAV of MIPs fall; this is when MIPs look to the equity portion in the portfolio to sustain returns.

Suitability

MIPs are suitable for an investor who is conservative, but would want to gain some exposure to equity. With many individuals looking at fixed deposits as an investment option, they could evaluate monthly income plans which would provide better returns in the long run and are also relatively tax efficient. It may also suit a senior citizen or some individual who is closer to retirement.

Budget Impact

In order to provide uniform taxation for all types of funds, other than equity oriented funds, the Government has increased the surcharge from 5% to 10%. The Budget also proposed increase in the rate on distributed income from 12.5% to 25% in all cases where distribution is made to an individual or an HUF. This will impact the net returns on dividend schemes of all debt mutual fund schemes.

 Summary –
•    Suitable for current environment as interest rates will moderate in the short – medium term
•    Provides upside at controlled risk; equity exposure is capped
•    Conservative investors / Senior Citizens can avail this option
•    Tax efficiency and returns help MIPs score over other debt instruments like Fixed Deposits


Anil Rego is the CEO and founder of Right Horizons, an end-to-end Investment advisory and wealth management firm.

Latest News

  • India needs to be energy independent to serve people's need: Modi

    New Delhi, March 27 (IANS) Stressing on energy security, Prime Minister Narendra Modi on Friday said India will have to be independent in this area and seek new avenues to replenish existing sources in a bid to serve the growing appetite of the people. "We need to be independent when it comes to providing our people with energy," Modi said, while inaugurating the "Urja Sangam - 2015" conference on energy security at the Vigyan Bhavan exposition complex here. …

  • Gold buying slows amid price rally; Akshaya Tritaya demand eyed in Ind …
    Gold buying slows amid price rally; Akshaya Tritaya demand eyed in Ind …

    Gold bullion purchases across Asia slowed this week as a long rally in prices discouraged buyers, with traders keeping a close watch on top consumer India ahead of a festival that usually sparks strong demand for the metal. Before dipping on Friday, spot gold had rallied the seven days through Thursday in the longest winning stretch since 2012 on a softer dollar and caution from the Federal Reserve over U.S. interest rate hikes. "The sudden jump in gold prices has dampened demand in the …

  • Exclusive: Modi govt puts brakes on universal health plan

    Prime Minister Narendra Modi has asked for a drastic cutback of an ambitious health care plan after cost estimates came in at $18.5 billion over five years, several government sources said, delaying a promise made in his election manifesto. The health ministry developed a draft policy on universal health care in coordination with the prime minister's office last year. The health ministry proposed rolling out the system from April 2015, and in October projected its cost as $25.5 billion over …

  • Apple planning to unveil 3 iPhones this year including iPhone 6C

    Melbourne, March 27 (ANI): Apple's iPhone fans may receive three surprises at once this year as reports suggest that the firm is planning on unveiling three new models of the iPhone in September. …

  • India may exempt ONGC, Oil India from paying subsidy in March-quarter - …

    State-backed oil producers Oil and Natural Gas Corp Ltd(ONGC.NS) and Oil India Ltd(OILI.NS) may be exempt from paying subsidies to fuel retailers in the March quarter, a source familiar with the plan said on Friday. India regulates retail prices of liquefied petroleum gas and kerosene to keep prices under check, with producers like ONGC and Oil India selling crude and related products to fuel retailers at a hefty discount to partly compensate for the losses. In addition, the oil ministry has …

  • Modi says India should try to cut oil imports by 10 percent in 2022
    Modi says India should try to cut oil imports by 10 percent in 2022

    Prime Minister Narendra Modi said on Friday India should try to cut oil imports by 10 percent in 2022 from 77 percent now. He was addressing an energy summit in the capital city of New Delhi. India imports ... …

  • Exclusive: Upset by Warren, U.S. banks debate halting some campaign do …

    Big Wall Street banks are so upset with U.S. Democratic Senator Elizabeth Warren's call for them to be broken up that some have discussed withholding campaign donations to Senate Democrats in symbolic protest, sources familiar with the discussions said. Representatives from Citigroup (C.N), JPMorgan (JPM.N), Goldman Sachs (GS.N) and Bank of America (BAC.N), have met to discuss ways to urge Democrats, including Warren and Ohio Senator Sherrod Brown, to soften their party's tone toward Wall …

  • India turns to 'satellite god' for crop mapping

    Sher Singh, a farmer from Rajasthan, prays to Varuna, the Hindu god of water, for a bountiful harvest. Now, he is also looking to the heavens for satellite imaging to boost his crop. Prime Minister Narendra Modi wants to promote a "per drop, more crop" approach to farming to make better use of scarce water, and aims to have a new satellite crop monitoring system working in time for the peak of this year's monsoon in July. Using remote analysis to assess soil moisture and crop development has …

DON'T MISS

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    15.90-0.10-0.63%
    UNITECH.BO
    180.00+18.15+11.21%
    IDFC6.BO
    26.35-0.05-0.19%
    SUZLON.BO
    151.75+6.70+4.62%
    POWERGRID6.BO
    26.25-0.75-2.78%
    LYCOS.BO
  • Price % Gainers
    Price % Gainers
    NamePriceChange% Chg
    120.70+108.63+900.00%
    ARISINT.BO
    140.00+126.00+900.00%
    ZPPOLYSA.BO
    30.00+13.50+81.82%
    GSS6.BO
    62.25+11.40+22.42%
    PENIND4.BO
    1,180.00+172.85+17.16%
    HDFCBANK6.BO
  • Price % Losers
    Price % Losers
    NamePriceChange% Chg
    336.30-90.70-21.24%
    UPL6.BO
    1,645.00-330.20-16.72%
    LUPIN6.BO
    66.60-13.30-16.65%
    SAHARA.BO
    680.00-125.80-15.61%
    YESBANK6.BO
    9.39-1.71-15.41%
    PEARLPOLY.BO

QUOTES

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.