What are mutual fund monthly income plans?


Monthly Income Plans (MIP) are hybrid debt oriented mutual fund schemes where debt allocation is high and the equity allocation is fairly small. Currently equity allocation in monthly income plans (MIPs) range from 5 to 25% whereas debt allocations can range from 75 to 95%. In a MIP scheme, the debt component lowers the investment risk and generates stable returns while the equity portion provides a boost to returns over a sufficiently long investment horizon.

Though the name monthly income plan (MIP)may suggest that these mutual fund schemes will make monthly payouts to investors, investors should note that, mutual fund dividends are not assured either in terms of frequency or the amount. Though the top performing MIPs have paid regular monthly / quarterly dividends over the last few years, there have been instances, particularly during prolonged bear markets, when MIPs were not able to pay monthly dividends.

See the dividend payment track record of MIPs

However, if investors are not looking for assured returns, then, historical data shows that, MIPs can give significantly superior returns compared to risk free investments. Hybrid debt funds or MIPs have given over 10-12% annualized returns in the last 5 years which is quite higher compared to average FD returns of around 7.5-8%.

Superior tax adjusted returns – MIPs enjoy considerable tax advantage over traditional risk free fixed income investments, likeBank FDs, Post office monthly income scheme etc. particularly if the investor is in higher tax bracket. While Bank fixed deposit and Post office monthly income scheme interest are taxed at the income tax rate of the investor, long term capital gains (investment holding period of at least 3 years) of MIPs are taxed at 20% after allowing for indexation benefits. The indexation benefit reduces the capital gains tax obligation substantially for the investors over 3+ years of investment horizon.

Dividends paid by mutual fund MIPs are tax free in the hands of the investor but the AMC has to pay dividend distribution tax (DDT) at the rate of 28.84%.

Mutual fund Monthly Income Plans (MIPs) also offer more flexibility compared to risk free fixed income products like Bank FDs and Post office MIS. Unlike Post Office Monthly Income Scheme, where the maximum investment amount is Rs 4.5 lakhs, you can invest any amount in mutual fund MIPs. MIPs being open ended funds, investors can redeem units of MIP schemes anytime. However, it is better to redeem after 12 months as investors can avoid the exit load period (which is usually 12 months). Bank Fixed Deposits and Post office MIS charge penalty for premature withdrawals.

Check which are the top Mutual Fund MIP Schemes

Even though MIPs are subject to market risk, the high debt component of the portfolio reduces the risk of capital loss considerably. This is also the reason why MIPs are less volatile than equity mutual funds.

For moderately conservative investors with long investment horizon (3 years and above), the risk return trade-off in monthly income plans (MIP) is quite favourable. Investors can get the benefits of equity price appreciation and also the tax advantage, while earning stable income during the investment period provided they have at least 3 years of investment horizon for MIPs.

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