Monthly Income Plans in Mutual Funds

What is a Monthly Income Plan?

Monthly Income Plans (commonly referred to as MIPs) are typically structured as Conservative hybrid funds under SEBI's mutual fund categorisation norms. They hold the majority of their investments in debt instruments such as government securities, corporate bonds, and money market instruments, leaving a smaller portion for equities or equity-related instruments. As required by the scheme, the portfolio typically allocates a majority to debt instruments, with a smaller exposure to equities, depending on the scheme mandate.

Investors may opt for IDCW payouts or use a Systematic Withdrawal Plan (SWP) facility to withdraw a fixed amount periodically. IDCW payouts are declared at the discretion of the fund house, subject to availability of distributable surplus. These schemes are suitable for conservative investors who would like to have lower volatility as opposed to pure equity funds.

How Monthly Income Plans Work

Monthly income plans earn returns by investing in both debt and equity, giving investors choices in how they get their earnings.

1. Portfolio Composition

   The returns of MIPs are made as a result of interest with regard to debt holdings and capital gains with regard to equity exposure. The debt will offer consistency and a fixed flow of income whereas the equity will contribute to long-term growth and will balance inflation.

2. Investment Options

   Shareholders have options of dividend or growth. In the IDCW alternative, the payouts are made periodically, which depend on the performance of funds. Under the growth option, the returns are reinvested thus enabling the investment to accrue with time.

3. Taxation

   The taxation of Monthly Income Plans will vary based on the equity allocation of the scheme at the time of redemption. In the case of equity exposure of 65% or above, the scheme is taxed as an equity based mutual fund according to the current tax regulations. The capital gains would be grouped in this way according to the holding period and the rates on the equity funds.

   If the scheme invests less than 35% of its assets in domestic equities, capital gains are taxed at the investor's applicable income tax slab rate, without indexation benefits, irrespective of the holding period. This applies to units acquired on or after 1 April 2023. The equity allocation thus determines whether the scheme qualifies for equity or debt taxation norms at the point of exit.

   Schemes with domestic equity exposure between 35% and 65% may be subject to a different capital gains framework depending on the date of acquisition.

Suitability and Considerations

Understanding whether an MIP aligns with one's financial goals and risk appetite is essential before making an investment decision.

1. Who Should Invest

   MIPs can typically be utilised by retirees, conservative investors or those who need a supplement to income. They usually have much greater liquidity when compared to traditional fixed deposits, with exit loads and NAV changes dependent on the market.

2. Risk Factors

   They are, however, exposed to equity risk and interest rate risk by debt instruments and hence are subject to market risks. Before an investor makes an investment, he or she ought to consider the historical performance of the scheme, asset allocation, expense ratio and the track record of the fund manager.

Key Takeaways

The equity part is limited and subject the fund to market variability, thus market-based returns are not guaranteed. Another factor to be considered is that monthly income cannot be guaranteed. Dividend declarations depend on the performance of the funds. The distribution of an excess surplus depends on the choice of the asset management company.