Are you looking for that investment which can offer higher return than your Fixed Deposits? Are you searching for a better investment avenue to invest lump sum money for your short-term financial goals?
Then, Monthly Income Plans (MIPs) offered by Mutual Funds can be one of the best investment options for you. MIPs can provide better returns than Bank Deposits / Post office Savings Schemes, but you should be willing to take slightly higher risk.
MIPs are suitable for risk-averse investors who do not want to take high risk (or) who do not want to invest in Equities or Equity oriented products, but can afford to take low or medium risk.
What are Monthly Income Plans (MIPs) ?
Monthly Income Plans (MIPs) are primarily ‘Debt oriented schemes’. These funds invest in a mix of equity and debt in the proportions of 20:80 or 30:70 or other proportions of similar kind. The objective of these funds is to provide enhanced regular returns to risk-averse investors by taking small positions in equity assets.
The major chunk (70 to 100%) of fund corpus is invested in interest yielding Debt instruments like ‘commercial paper, certificate of deposits, government securities, bonds, treasury bills etc., The remaining portion ( 0 to 30%) of the fund corpus is invested in Equity securities (stocks / shares).
The debt portion ensures stability, safety and consistency, while the equity instruments in the portfolio boost the returns. MIPs are market-linked products (to the extent of their equity portfolio).
Generally MIPs fall under Hybrid – Debt category of mutual funds. Depending on the percentage of equity exposure that MIPs take, they can further be classified into MIP Aggressive or MIP Conservative Plans.
MIPs which invest in equity securities in the range of 15% to 30% can be treated as “MIP Aggressive Plans” (Hybrid – Debt oriented aggressive schemes). These MIPs may offer slightly higher returns when compared to “MIP Conservative schemes”. But, do note that the improved returns come at a higher risk.
Do Monthly Income Plans provide regular income?
MIPs aim to provide investors with regular pay-outs (through dividends). But, it is not mandatory for the mutual fund MIP scheme to provide regular income, as dividends are paid at the discretion of the fund house and subject to availability of distributable surplus.
Monthly Income Plan & options
- MIP Dividend Option (Income option) – MIPs with dividend option provides you an income in the form of dividends. The dividends received by the investor are tax-free. The mutual fund company deducts DDT (Dividend Distribution Tax) at the rate of around 28.8% and then pays you the net dividend amount. To receive dividend income, you have to opt for Monthly Pay-out or Dividend Pay-out option. Kindly note that the quantum of dividends may not be fixed.
- MIP Growth Option – If you select ‘growth’ option, you will not receive any payments (dividends). You will get your returns only on selling the units. Since the fund does not pay out any dividends the NAV is much higher than that of the dividend option for the same fund or scheme. If you do not want regular income then you may opt for ‘growth’ option.
Top 4 Best MIP Mutual Funds in India for 2016- 2017 (Conservative plans)
Below are the top rated Hybrid – Debt oriented & Conservative MIP schemes. (Returns given in the below table are for regular schemes)
- SBI Magnum MIP Fund : This fund has allocated around 13.6% of its corpus to Equities and around 83% of the Fund’s corpus has been invested in Debt-oriented securities. SBI MIP fund has ‘average’ risk grade and ‘above average’ return grade. This fund’s ‘Direct Plan‘ scheme has generated around 14% in the last one year. Regular scheme has given 12.67% return.
- Birla Sunlife MIP II Savings 5 Fund – This fund has around 9% exposure to equities (stocks). Though this fund has lower exposure to Equity than SBI MIP fund, it has been generating similar returns. The expense ratio is reasonable when compared to other MIP conservative funds. This fund also has ‘below average’ risk grade and ‘average’ return grade.
- SBI Magnum MIP Floater Fund – This fund has around 13% exposure to equity securities, 25% in Debt securities and around 61% in Money market instruments. It has generated returns of around 11.41% in the last five years. But fund has high expense ratio. This fund has ‘low risk’ grade and ‘average’ return grade (as per valueresearchonline.com).
- ICICI Pru MIP Scheme – It has around 13% exposure to equity and the remaining portion of the fund corpus has been invested in debt securities (84%) & 3% as cash. This fund has ‘ above average’ risk grade and ‘average’ return grade.
Top 6 Best MIP Schemes – Aggressive plans
Below are the top rated Hybrid – Debt oriented & Aggressive Monthly Income Mutual Fund schemes. (Returns given in the below table are for regular schemes)
- Birla Sunlife MIP II Wealth 25 Plan – This fund has around 30% equity exposure and is the main reason for fund’s out-performance. If your investment horizon is around 2 to 4 years, you may consider investing in this fund. This fund has ‘below average’ risk grade and ‘above average’ return grade. The direct scheme of this fund has generated return of around 17.48% in the last one year (regular scheme has generated 16.24% returns).
- Latest update (28-March-2017) : As per a notification by Birla AMC, the Asset allocation and investment pattern of this fund has been modified and this is with effect from 12-April-2017. The fund now can invest up to 10% (max) in Units issued by REITs. So, up to 40% (30% in Equities + 10% in units of REITs) can be allocated to Medium to High risk Securities. So, it is advisable to invest in this fund with a medium to long-term view.
- ICICI Prudential MIP 25 Plan has 23.6% exposure to equity and around 73% of the fund’s corpus has been invest in Debt securities. Kindly note that this fund has ‘high’ risk grade and ‘high’ return grade.
- HDFC MIP LTP : This has 24.6% exposure to equity and around 73% of the fund’s corpus has been invested in Debt securities. Kindly note that this fund has ‘average’ risk grade and ‘average’ return grade.
- Kotak MIP Regular Plan : This fund has allocated around 20% of its corpus to Equities and around 70% of the Fund’s corpus has been invested in Debt-oriented securities.
- UTI MIS Advantage Plan : This has 24% exposure to equity, 30% to Debt securities and around 36% of the fund’s corpus has been invest in Money Market securities. This fund has ‘average’ risk grade and ‘ above average’ return grade.
- Franklin MIP Fund : This fund has allocated around 19.6% of its corpus to Equities and around 70% of the Fund’s corpus has been invested in Debt-oriented securities.
MIPs for Lump Sum investment (and/or) Regular Income (Dividend Option Vs SWP)
- Lump sum Investment for accumulation : Let’s say your investment objective is to make one-time investment with a 2 to 4 year time-horizon, but would like to have less exposure to Equity, then investing in an aggressive MIP fund with Growth option can be a better choice.
- Lump Sum Investment for Regular Income : If your investment objective is to invest a lump sum amount in an MIP fund and would like to receive regular & fixed (monthly/quarterly/yearly) income then investing in MIP fund with Growth & Systematic Withdrawal options can be a prudent choice. Below are the reasons to justify this suggestion;
- Dividend Income plan can give you periodic income. But, the fund may or may not declare it and moreover the quantum of payment can vary (as indicated in the below image).
- Though the Dividend income received by you is tax-free, the fund house deducts DDT (Dividend Distribution Tax) of around 28% and then pays you the dividend. So, if you are in 10% or 20% tax bracket, opting for a MIP-Dividend payout plan is not a tax-efficient choice.
- Whether you are in 10 or 30% tax bracket, MIP Fund with Growth & SWP option can be considered if your withdrawals are for more than 3 years, because the Long term capital gains are taxed at 10% or 20% (with indexation benefit). The total tax liability will be less than the dividend distribution tax charged in the case of dividend option. This can increase your return on the investment.
- In SWP option, you can decide the frequency and quantum of payout. But kindly note that if your withdrawal amount is more than the capital appreciation then the payout is made from your Principal amount.
Mutual Fund Monthly Income Plans & Tax implications
- Mutual Fund MIP Schemes are treated as Debt oriented schemes (non-equity funds). So, the Long Term Capital Gains (LTCG) taxes are applicable on the units which are held for 3 years or more.
- Short Term Capital Gains (STCG) taxes are applicable on the units which are held for less than 3 years.
- STCG tax rate on MIPs is as per the investor’s income tax bracket and LTCG tax rate is at 20% (with indexation).
- If you opt for dividend option then any dividend income received from Monthly Income Plans is tax-free in the hands of investors.
Important Points to ponder about Mutual Fund MIP Investments :
- The performance of MIPs is greatly affected by interest rates in the economy (as majority of the fund’s corpus is invested in fixed income securities). So, MIPs tend to perform well when the interest rates fall (when there is a downward trend in the interest rate cycle). You can observe that MIPs (as listed in the above TOP MIPs tables) have performed well in the last one year or so, as RBI started to cut interest rates again. I believe that MIP schemes may continue to perform well in the next couple of years too.
- If you have a lump sum amount which needs to be invested for say 1 to 3 years then MIPs can be a better alternative to bank fixed deposits.
- You can also create SIPs (Systematic Investment Plans) in MIPs to realize your short-term goals.
- MIPs can be a decent bet if you are looking for regular income.
- Do watch out for ‘Exit Loads’, as most of the MIP Schemes charge an exit load of around 1% if you redeem the units in less than one year of holding.
- I believe that the ideal investment horizon in MIPs can be around 2 to 4 years.
- You may consider investing in Direct Plans of MF MIPs to get slightly better returns than Regular plans.
There are few other alternatives to MF MIPs like Arbitrage funds, Fixed Maturity Plans (FMPs), Post office Monthly Income Plan etc., But, I believe that Mutual Fund Monthly Income Plans can be a better option for a conservative investor who is looking for better returns by taking limited exposure to stock market. Monthly Income Plans schemes offered by mutual funds are definitely worth considering.
(Source : Moneycontrol & valueresearchonline. Returns are for Regular Growth schemes & on lump sum investments, as on 21-Oct-2016. Funds’ equity exposure details as of Sep 2016)
( Image courtesy of Stuart Miles at FreeDigitalPhotos.net)