Monthly Income Plan (MIPs)
In a mutual fund scheme, basically, the amount is paid in accordance with the fund objective set by the mutual fund house. As you know, the amount that they distribute is in the form of dividends depends on the profit they make.
These MIPs are generally ‘Debt oriented schemes’. They invest the money in a mixed format- in both equity and debt. They normally keep a ratio of 20:80 or 30:70 or so. Their aim is to give the maximum regular benefits to the investor by reducing the risks.
This because the former will give stable, safe and consistent income, while the equity will keep on fluctuating in accordance with the portfolio management.
Now see, even MIP can be done in two ways: MIP Aggressive & MIP Conservative Plans. It depends on the percentage of equity exposure that MIPs take.
“What are they?”
“Mmmm… for example:
Normally a MIP is affected by the interest rates. There is an inverse relationship between the interest rate and MIP. When interest rates go downwards MIP provide better returns and vice-e-versa. You have a variety of payout options- monthly, quarterly, half-yearly.
But they may charge an ‘Exit Load’, of around 1%, if you take it in less than one year of holding.
I believe that the ideal time for returns in MIPs can be around 3 to 4 years.”
“So it's not necessary that we get a regular income??” Raghav sounded curious.
“Well it not like that… You have two options in MIP say:
Dividend Option: Dividends in MIPs are tax-free in hands of investors but Mutual Fund companies have to pay a 28.33% Dividend Distribution Tax (DDT) including surcharge and cess and 30% plus surcharge and cess for others (33.99%) before distributing it to you as investors
Growth Option: If you opt for Growth option, it is subject to Capital Gains Tax. Short Term Capital Gains (if units are held for 36 months or less) are taxed as per the Income Tax Slab Rate of investors. For Long Term Capital Gains (if units are held for more than 36 months) are taxed at 10% without indexation or 20% with indexation. The indexation benefit inflates the cost of purchase lowering long term gains tax liability, which is not the case of FD.
The tenure of the holding period matters, when one has to decide between growth and dividend options. You can go for the growth option if the holding period is more than 3 years and for the dividend option if the holding period is less than 1 year.
Check an example of Indexation benefit here
Advantage of MIPs
Some of the features of balanced funds are:
1. Provides diversification in its truest sense by investing in bonds and equities
2. Invests sizable proportion inequities, hence the returns you receive are decent
3. Provides automatic portfolio re-balancing; an added cushion during volatile markets. Therefore, when markets are positive, the fund manager sells equity to maintain its maximum level and vice versa
Investors should bear in mind that MIPs are also subject to market risks as both invest inequities. Neither scheme can guarantee income or returns and one should opt for a fund in line with their risk profile and investment objectives.
In a mutual fund scheme, basically, the amount is paid in accordance with the fund objective set by the mutual fund house. As you know, the amount that they distribute is in the form of dividends depends on the profit they make.
These MIPs are generally ‘Debt oriented schemes’. They invest the money in a mixed format- in both equity and debt. They normally keep a ratio of 20:80 or 30:70 or so. Their aim is to give the maximum regular benefits to the investor by reducing the risks.
This because the former will give stable, safe and consistent income, while the equity will keep on fluctuating in accordance with the portfolio management.
Now see, even MIP can be done in two ways: MIP Aggressive & MIP Conservative Plans. It depends on the percentage of equity exposure that MIPs take.
“What are they?”
“Mmmm… for example:
Normally a MIP is affected by the interest rates. There is an inverse relationship between the interest rate and MIP. When interest rates go downwards MIP provide better returns and vice-e-versa. You have a variety of payout options- monthly, quarterly, half-yearly.
But they may charge an ‘Exit Load’, of around 1%, if you take it in less than one year of holding.
I believe that the ideal time for returns in MIPs can be around 3 to 4 years.”
“So it's not necessary that we get a regular income??” Raghav sounded curious.
“Well it not like that… You have two options in MIP say:
Dividend Option: Dividends in MIPs are tax-free in hands of investors but Mutual Fund companies have to pay a 28.33% Dividend Distribution Tax (DDT) including surcharge and cess and 30% plus surcharge and cess for others (33.99%) before distributing it to you as investors
Growth Option: If you opt for Growth option, it is subject to Capital Gains Tax. Short Term Capital Gains (if units are held for 36 months or less) are taxed as per the Income Tax Slab Rate of investors. For Long Term Capital Gains (if units are held for more than 36 months) are taxed at 10% without indexation or 20% with indexation. The indexation benefit inflates the cost of purchase lowering long term gains tax liability, which is not the case of FD.
The tenure of the holding period matters, when one has to decide between growth and dividend options. You can go for the growth option if the holding period is more than 3 years and for the dividend option if the holding period is less than 1 year.
Check an example of Indexation benefit here
Advantage of MIPs
Some of the features of balanced funds are:
1. Provides diversification in its truest sense by investing in bonds and equities
2. Invests sizable proportion inequities, hence the returns you receive are decent
3. Provides automatic portfolio re-balancing; an added cushion during volatile markets. Therefore, when markets are positive, the fund manager sells equity to maintain its maximum level and vice versa
Investors should bear in mind that MIPs are also subject to market risks as both invest inequities. Neither scheme can guarantee income or returns and one should opt for a fund in line with their risk profile and investment objectives.
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