Monthly Income Plan (MIP) - Meaning, Types and Taxes (2024)

Monthly Income Plans, abbreviated as MIPs, are hybrid mutual funds with a debt orientation, offering investors a fixed monthly return. While the equity investment proportion is relatively low, it provides an incremental advantage to the stability of the fund's debt component.

In this article we are going to explorewhat Monthly Income Plan (MIP) is,key features of MIP,Benefits of MIP, Types of MIP, and much more

What is a Monthly Income Plan (MIP)?

A monthly income plan (MIP) is atype of mutual fund that invests mainly in debt and equity securities with a mandate of producing cash flows and preserving capital. MIPs are designed for investors who want to receive a regular income from their investments while taking moderate risks. It is important to note that regular income is not guaranteed as it is subject to availability of surplus funds generated by the fund manager. The aim of an MIP is to provide a steady stream of income in dividends and interest payments.

Key features of monthly income plans

Monthly Income Plans (MIPs)are investment options designed for conservative, risk-averse investors seeking a steady source of income. Let us explore their key features and benefits:

• MIPs invest around 70% to 80% of their portfolio in debt instruments such as bonds, debentures, and money market instruments, and the remaining in equity and equity-related instruments.
• MIPs offer two options to investors: Dividend and Growth. In the dividend option, investors receive periodic pay-outs from the fund, whereas in the growth option, the returns are reinvested in the fund and reflected in the net asset value (NAV).
• MIPs do not guarantee a fixed or regular income, as the dividends are declared only when the fund has distributable surplus and the NAV is above the face value. The income may also vary depending on the market conditions and the fund performance.
• MIPs are suitable for investors who have a low to moderate risk appetite and a medium to long-term investment horizon. They can provide higher returns than fixed deposits and post office monthly income schemes, but lower than pureequity funds.

Benefits of Monthly Income Plans (MIPs)

Looking for a reliable income source? MIPs might be the answer. They offer several advantages for investors seeking stability:

• Regular paychecks:MIPs are designed to distribute dividends regularly, acting like a monthly salary from your investments.
• Spread the risk:MIPs invest in both debt (bonds) and equity (stocks), creating adiversified portfolio. This reduces overall risk while aiming for consistent returns.
• Focus on stability:A larger portion of MIPs goes towards debt, known for lower risk compared to stocks. This makes them a more conservative option withinmutual funds.
• Tax perks:MIPs can be tax-friendly for those in higher tax brackets. There's a limit on how much tax you pay on dividends received. This translates to more money in your pocket.

Types of monthly income plans

Monthly Income Plans (MIPs) are investment options designed for conservative, risk-averse investors seeking a steady source of income. Let us explore their key features and benefits:

• MIPs can be classified into two broad categories based on their equity exposure: Conservative and Aggressive.
• Conservative MIPs invest up to 15% of their portfolio in equity and equity-related instruments, while aggressive MIPs invest up to 25% or more.
• Conservative MIPs are less volatile and more stable than aggressive MIPs, but they also offer lower returns potential. Aggressive MIPs are more risky and volatile, but they can also generate higher returns in the long run.
• Investors can choose the type of MIP that suits their risk profile and return expectations.

Taxes on monthly income plans

Let us explore the tax implications of Monthly Income Plans (MIPs):

• MIPs are taxed as debt-oriented funds, as they invest more than 65% of their portfolio in debt instruments.
• The capital gains from MIPs are taxed depending on the holding period of the investment. If the units are sold within three years of purchase, the gains are treated as short-term capital gains (STCG) and taxed at the investor’s slab rate. If the units are sold after three years of purchase, the gains are treated as long-term capital gains(LTCG) and taxed at 20% with indexation benefit.

Ideal investors for monthly income plans

• Monthly income plans are best suited for investors who want to gain returns higher than they can get from other fixed-income investment sources with low risks associated with them. Retirees and people having a low-risk appetite as well as a lower budget fit this category well.
• MIPs are also ideal for investors who want to have some exposure to the equity markets without taking high risks. MIPs can provide the benefits of diversification, capital appreciation, and regular income.
• MIPs are also suitable for first-time mutual fund investors who want to experience the market with a low-risk investment option.

Ways to invest in monthly income plans online

Investors can invest in monthly income plans online through the following ways:

• Through online platforms, that offer various MIPs from different fund houses and allow investors to compare, select, and invest in them easily and conveniently.
• Through the websites or apps of the Asset Management Companies (AMCs) that offer the MIPs and allow investors to invest directly without any intermediaries or commissions.
• Through the websites or apps of online brokers or distributors that offer MIPs along with othermutual fund schemes and charge a nominal fee or commission for their services.

How to analyse MIP returns?

MIPs have the potential to yield greater returns compared to pure debt funds owing to their equity exposure. Historically, they have provided returns ranging from 10% to 12%, surpassing the offerings of fixed deposits. Nonetheless, dividend distributions are subject to the discretion of the fund company and are not assured.

Risks involved in Monthly Income Plans (MIPs)

Here is a breakdown of the potential pitfalls to consider when investing in MIPs:

• Market volatility: Do not be fooled by the "low-risk" label. MIPs are still exposed to ups and downs in both the stock and bond markets, impacting the overall value of your investment.
• Interest rate rollercoaster: Since MIPs heavily rely on debt instruments, rising interest rates can cause their value to take a tumble.
• Credit woes: There's always a chance that companies or governments issuing the debt securities in the MIP might default, meaning you could lose some of your invested money.
• Inflation erosion: Inflation can outpace the returns offered by MIPs, silently eating away at the purchasing power of your investment over time.

Things to consider before investing in monthly income schemes

Before investing in a monthly income scheme, investors should consider the following factors:

• Their risk tolerance level, as different MIPs have different levels of risk and volatility.
• Their investment objectives and time horizon, as MIPs are meant for medium to long-term investments.
• The market conditions and interest rate scenario, as they affect the performance and returns of MIPs.
• Thefund manager’s expertise and track record, as they determine the fund’s portfolio composition and asset allocation.

The expense ratio and exit load of the fund, as they affect the net returns of the investment.

Conclusion

Monthly Income Plans (MIPs) offer investors a balanced approach to generating regular income while preserving capital. By investing in a mix of debt and equity instruments, MIPs aim to provide stable returns with lower volatility. However, it is essential for investors to assess their risk tolerance and investment objectives before considering MIPs as part of their portfolio.

After you have performed the required analysis and identified the funds you want to invest in, you can visit the Bajaj Finserv Mutual Funds Platform and start your lump sum orSIP investment. With over 1,000 funds available to choose from, you are bound to find the funds that align with your risk preferences and financial goals.

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