A Monthly Income Plan is a kind of mutual fund wherein the investment is allocated proportionately between the equity and debt markets in approx 20:80 ratio. Put simply, it is a debt oriented mutual fund, the objective of which is to provide the investor with periodic payouts on a monthly basis. Since it is a market linked product, the returns are not guaranteed, instead they depend upon the fund performance.
Monthly Income Plan has gained popularity as an ideal investment tool to beat inflation at a minimal risk.
The Key Features
MIP boasts of many features that gives it an edge over its conventional alternatives as Bank FDs and and post office Monthly Income Scheme (MIS).
Primarily, the returns yielded by MIP are bigger (11-14%) than that yielded by FDs and MIS (8-9%).
Secondarily, unlike its conventional counterparts, there is no limit on investment made on MIP. There's no entry charge in MIP, but there's an exit charge, which is usually 1.0%. On top of that, there's no lock in period. So, MIPs have a higher liquidity. What's more, MIP also frees the investor of having to keep a watch over the funds or bearing headaches over switching funds.
In the case of MIP, a rise in interest rate causes a fall in NAV and a fall in interest rate causes a rise in NAV. So, the best time to invest in MIP is when the interest rates are high.
MIPs work on an unique mechanism. The declared dividends do not represent the total earnings on funds but just a fraction. The surplus so left is made use of in the future in declaring dividends when there are no substantial earnings on funds.
Types of MIP
Basically, Monthly Income Plans are of two types:
(a) Dividend Based MIP – Monthly payouts are made out in the form of dividends. The dividends earned by MIP are tax-free for the investor. But here's the catch, the dividend amount that the investors ends up getting is actually the earned dividend less 14% dividend distribution tax.
(b) Growth Based MIP – Here, the profit made on the capital keeps getting added to the capital. However the money is not paid out to the investor at periodic intervals, instead it is paid along with the capital when the units are redeemed.
Who should buy it?
MIPs are for those risk averse investors who like to stay somewhere in between the safe zone of debt funds and the risk zone of equity funds. These are usually the reserved investors who wouldn't mind taking a little risk on their portfolio.
MIPs are most suited to retired persons or those who on the verge of retirement and looking to invest their money somewhere safe that could guarantee a fixed periodic return. It also works well for the new entrants in mutual funds, ready to take their first humble steps in equity exposure.
Best Performing MIPs
Being a dynamic investment product, there's no Monthly Income Plan that stays at top all the time. However, there are a few MIPs that have performed consistently well, yielding a substantial return in the range of 10-13% for the last 5 years.
- SBI Magnum MIP Floater
- ICICI Prudential MIP 25
- HDFC MIP
- Baroda Pioneer MIP Fund
- Canara Robeco MIP
- Reliance MIP
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