In recent years, monthly income plans (MIPs) of mutual funds have become quite popular with the investors for their safety and ability to yield returns higher than a bank FD due to its equity exposure. While MIP is a smart investment avenue for conservative investors, as it aims at providing reasonable returns with limited risks, it is important for investors to not be misled by its name: Monthly Income Plan.
A MIP is a hybrid investment avenue offered by the mutual funds that invests a small portion of its portfolio, around 5-25%, in equity and the balance in debt and money market instruments. The equity component acts as a catalyst that helps the fund generate that extra return. MIPs provide regular income to investors, but the periodicity depends upon the option you choose. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where you do not receive regular dividends, but gain in the form of capital appreciation.
A MIP is best suited for investors with a conservative risk profile who want to take exposure in equity but want to contain the risk of downside. MIPs also appeal to investors in the higher tax bracket as these schemes offer better post-tax returns compared to other investment options such as fixed deposits. MIPs offer flexibility to invest across asset classes and hence can offer great value to an investor’s portfolio. A MIP typically invests in equity and debt instruments, however new products like Religare MIP Plus or Taurus MIP Advantage have some allocation of their portfolio towards Gold.
With MIPs, in periods where the broader market is down, investors will be happy to see that their investment base has not been damaged as badly as someone else who is fully invested in equities, because of the high debt component they come with. So for example, in a volatile equity market, an MIP would increase its debt holding to contain downside risks and generate decent returns. While in a scenario of declining debt returns, the small dose of equity would provide some boost to the overall performance of the fund; hence giving investors best of both the worlds.
Why MIP?
Safety:
with high exposure in debt, an investor can rest assured that the money invested would not be susceptible to volatility and would generate consistent returns.
Higher returns:
they offer returns higher than a fixed deposit or bonds, because of the kick provided by the equity exposure.
Tax efficiency:
Dividends declared under MIPs are tax-free. Income from bank fixed deposits is taxable as income from other sources and is taxed depending on the tax bracket of the individual. Further, if the interest income exceeds Rs 5,000 in a financial year, then TDS is applicable, which is so not the case in a MIP. They offer active management of debt-equity (in some cases gold) allocation
Liquidity:
MIPs score high on liquidity parameter, as you can easily redeem your fund at the market price anytime you need cash.
IMPORTANT CONSIDERATIONS WHEN SELECTING YOUR MIP INVESTMENT
Investors must take care of a few things before they decide to invest in a MIP:
1. Returns are not assured
The name Monthly Income Plan can be deceptive because MIPs do not offer assured returns. They are market-linked products and declaration of dividend is subject to the availability of distributable surplus.
A MIP typically aims at providing regular income (not necessarily monthly, as the name suggests) to the unit holder, usually by way of dividend. The return of an MIP is dependent on the performance of the stock markets, economy and corporate sector. There are no guaranteed returns in a MIP, owing to its equity component. At the same time, the equity component of the fund could make all the difference. Positive momentum in equity markets would significantly boost the returns MIPs, but that may not always be the case. So do not be confused with the name, and remember that they may not always generate the regular income you were looking for.
2. Regular Dividend may not always be a good thing
Often investors consider a MIP plan based on its dividend record, as they correlate the dividends declared with the fund’s performance. Hence, a fund distributing regular dividend is considered a good buy. However, this need not always hold true. Though MIPs that perform well are expected to declare dividends regularly, there can be occasions when even the opposite holds true.
Many a times, fund houses declare dividends to attract investor’s attention, to maintain a consistent dividend paying track record, despite testing market conditions. The dividend track record can also be flaunted as a sales pitch to attract investors to the fund. On the other hand, there could be funds that choose to use that surplus money to invest at attractive valuations and skip dividends to improve the performance of their fund.
So while dividend history must be considered when selecting a MIP, it should not be the sole basis of your investment decision.
3. Check Portfolio Composition
It is important that an investor checks the portfolio composition of the scheme before investing in the plan. Usually, MIPs offer an equity component ranging from 5-25 per cent. While a higher equity component can aid the fund in offering higher returns, the same can also enhance the MIP’s risk profile. Hence, it is important that you only choose the scheme that matches your risk profile and not get misguided by the higher return.
An MIP is a pre-dominantly debt offering, hence the debt portfolio’s composition would have a significant impact on the fund’s performance. The choice of the debt selection depends on a lot of factors including interest rate scenario, credit rating and maturity. A debt portfolio bearing low credit rating may be able to generate better returns, but it comes with a higher risk. Moreover, changing interest rate scenario would require different instrument like a floating rate fund, however when the rates are expected to decline, a fixed rate would work best to lock-in the higher interest.
Thus review the portfolio carefully before zeroing-in on the MIP plan you would invest-in.