If you have enough cash to put aside and are looking at a more organized and disciplined investment option. An investment option that would fetch you better returns and gives you regular income, with little or moderate risk involved, it would be wise to opt for a debt fund. And if you are hunting for a fund that is systematic in nature and allows only small amounts to be allocated to equity or balanced fund as per the risk appetite. So, now if all of the above or most of the requirements echo the same thought in your head for your investment plan, then Monthly Income Plan (MIP) should be the right choice for you.
To define what Monthly Income Plans are it would be apt to put that these are debt oriented funds that reap income as dividends. MIPs are mutual funds that invest in debt instruments like corporate bonds, government securities, debentures, etc., which form the larger share of the investment to say about 80% and the rest of it being equity and cash. Now as far as the returns are concerned, the same can be received basis your choice of return duration, which can be monthly, quarterly, semi-annually or annually.
Now like mentioned above, there’s option for MIP to earn income as dividends or do you want them to give you growth, you must make a choice. In dividend option you receive dividends that are tax-free as the company pays out dividend distribution tax before it reaches the hand of the investors. Whereas in case of growth options, instead of dividends the money keeps on growing within the mutual funds and will reap you benefits only once the funds are redeemed.
Now apart from knowing what are monthly income plan and the two types of returns that can help you choose your investment path, there are several other things to know and consider when investing in Monthly Income Plans.
What should compel an investor to go for monthly income plan?
- If you are an investor who is looking for regular income say monthly, quarterly, semi-annually or annually, must opt for MIPs.
- If you aim better returns than fixed deposits, you must opt for MIPs.
- If you are salaried person or are nearing your retirement, you must opt for MIPs.
- If you want medium term low risk option to park your lump sum funds, you can try MIPs.
What are the broad features of MIPs?
- Dividends are rolled out only on the profits earned and not from the capital invested. So, in case of growth of NAV from Rs. 10 to Rs. 10.3, dividends will be given out on only 0.3.
- Don’t get the name of the fund wrong and expect it to fetch you income monthly, as there is no guaranteed monthly income. While the plan intends to declare regular dividends, due to unfavorable conditions and performance it might not be able to do so.
- Despite being debt oriented funds, there can be negative return situations which can put their safety in jeopardy in extreme cases.
- Debts are influenced by interest rates inversely. So, when interest rates fall, NAV of bonds rise. And when interest rates rise, the NAV falls. Equity bit of the fund structure at these times help maintain the fluctuation in returns.
Harsimran Tikka, a blogger & literature fanatic. Loves doing analysis on any new financial product that comes into market and provides her views. She has written several articles focusing on mutual funds, investment etc.