What is a Monthly Income Plan (MIP)?

Looking for a lower-risk investment option for monthly income needs? MIPs might be right for you!
Monthly Income Plan
4 mins
23 January 2024

A monthly income plan (MIP) is a type 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.

Key features of monthly income plans

  • 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 pure equity funds.

Types of monthly income plans

  • 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

  • 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.

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.
  • The fund 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.

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 other mutual fund schemes and charge a nominal fee or commission for their services.

Frequently asked questions

Which type of mutual fund is best for monthly income plan?

The best type of MIP depends on your risk profile and income needs. Generally, conservative MIPs have lower equity exposure and lower volatility, while aggressive MIPs have higher equity exposure and higher returns potential.

How does a monthly income plan work?

A monthly income plan works by distributing the profit from the investments at regular intervals, usually monthly or quarterly. The income can be in the form of dividends or capital withdrawals. The profits are subject to availability of surplus and is applicable only for dividend plan. For growth plan there will not be any distribution of profit at regular interval.

Is a monthly income plan a good investment?

A monthly income plan can be a good investment for moderate risk-averse investors who want some exposure to the equity markets along with a fixed income. MIPs can also be suitable for senior citizens or retirees who need a regular income stream, provided that they choose the dividend plan.

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