MIP : Regular Income! Liquidity! Attractive Returns!
Written on Sunday, November 19, 2017
By Vijay Thapliyal
In current market scenario, when Fixed Income alternatives are reducing because of limited options available in terms of low returns and unfavorable taxation, Monthly Income Plan (MIP) comes out be the suitable solution for the clients with conservative to moderate risk appetite.
MIPs are the hybrid investment avenues that invest a small portion of their portfolio (around 15 %-25 %) in equities and the remaining in debt and money market instruments (i.e. bonds, certificates etc). MIPs can provide regular inflows to the investor, 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 gains in the form of capital appreciation. However, like any other fund, the returns are market-driven from the equity component of the portfolio. Though many fund houses attempt to declare a monthly dividend, they are not obliged to so.
With the current levels of market volatility, MIPs can be a good option considering their exposure to debt instruments. These will help you maintain a low-risk portfolio and generate relative regular and stable returns. Stability, rather than quick and high returns, should be the priority for a typical MIP investor.
MIPs differ from Income funds, which are launched with the objective of posting regular returns (either in the form of dividends or capital appreciation) only from debt securities.
Benefits in MIPs:
In terms of risk-return profile, MIPs fit in nicely between a bond fund and a balanced fund. MIPs have the advantage of choosing among sovereign, corporate and money market instruments while the flexibility to invest a minor portion of the portfolio in equity provides a booster to the portfolio returns. Given the increased volatility in global markets over the last few years, the flexibility of MIPs to change portfolio composition among various asset classes puts them in an advantageous position over funds that stick to a particular asset class. At the same time, the nature of MIPs makes them a safe as a predominant portion is invested in debt.
Who should invest in MIPs?
If you are conservative in your investments but want to earn marginally better returns than a debt-only portfolio, then the MIP is for you. A MIP typically invests a majority of its assets in debt and keeps a small exposure to equity as well in order to gain something extra.
Usually retired persons avail MIPs as the 'Growth' option of a MIP fits into the risk-return profile between a balanced fund and a pure income fund. This is attractive to investors like HNIs, Institutions, Trusts etc. as these investors typically do not require a regular monthly dividend inflow. However, capital appreciation with a controlled level of risk is an extremely important parameter for investment. The controlled equity exposure of around 15-25% should deliver the icing on the cake over the medium term and should generate higher returns compared to a pure debt fund, albeit with a slightly higher level of risk.
MIPs are more tax efficient than FDs. Dividends declared under MIPs are tax-free in the hands of the investor. Income from bank FDs 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. 10,000/- in a financial year, then TDS is applicable.
Few MIPs with Smart Features of “No Exit Load up to 10% of the Investment”
Since, MIPs do not enjoy the tax benefits of equity funds and are taxed just like debt funds, where the dividend is tax-free in the hands of the investors but only after deduction of dividend distribution tax. Few MIPs have developed a smart approach in a combination of SWP (systematic investment plan) to overcome the taxation limitation in Debt funds. Now one can also plan a tax-efficient income stream from MIPs using this smart approach.
SWP in MIPs come with following benefits:
1. Fixed Monthly inflow to the investors, just like salary
2. Possibility of anytime withdrawal due to open-ended nature
3. Possibility of any time additional purchase or top-up
4. Lower taxation than many of the Fixed Income/Debt options. A typical SWP with 8% withdrawal rate would attract 3-7% tax as against 30% on interest income from a Bond. This example is for an individual in highest (30%) tax slab.
Follow these rules while doing SWP in MIP:
a. Start SWP only after 6 months from date of investment
b. Choose those schemes which have minimum 10% exemption on exit load within 1 year
c. SWP amount should not be more than 7-8% of the initial investment amount
d. Avoid interim redemptions from the market value of the MIP, unless necessary.
If planned judiciously, MIP with SWP can ensure principal amount remaining almost intact while still giving regular monthly inflows to the investor.