Monthly Income Plan (MIP)

Monthly Income Plans (MIPs) are mutual funds aiming those who are seeking ways to earn an additional fixed income on their investment.
Monthly Income Plan (MIP)
4 mins read
23-May-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 explore what 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 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. 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 pure equity 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 a diversified 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 within mutual 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 other mutual 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.
  • 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.

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 or SIP 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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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.

Can we earn monthly income from mutual funds?

Yes, you can earn monthly income from mutual funds through two main ways: dividend option and systematic withdrawal plan (SWP). The dividend option distributes a portion of the fund's profits to investors periodically, while SWP allows you to withdraw a fixed amount from your investment at regular intervals.

How to earn Rs. 20,000 per month in mutual fund?

There's no guaranteed way to earn a specific amount like Rs. 20,000 per month from mutual funds. However, you can estimate the monthly investment needed based on your target income and the expected dividend yield of the fund. Remember, this is a simplified calculation and actual returns can vary.

Where should I invest Rs. 25 lakh to get monthly income?

Choosing where to invest Rs. 25 lakh to get monthly income depends on your risk tolerance and financial goals. MIPs (Monthly Income Plans) are a type of mutual fund that aims to provide regular income, but they also involve exposure to the stock market. Consulting a financial advisor can help you create an investment plan that meets your needs.

Do mutual funds pay monthly income?

Some mutual funds, such as Monthly Income Plans (MIPs) or dividend-paying funds, may provide monthly income distributions to investors.

Q: Can I get monthly income from SIP?

Systematic Investment Plans (SIPs) typically involve regular investments at predefined intervals, but they do not guarantee monthly income as returns are subject to market fluctuations.

Can I invest Rs. 100 per month in mutual funds?

Many mutual fund schemes offer SIP options with low investment thresholds, including Rs. 100 per month, making it accessible for investors to begin systematic investing.

What if I invest Rs. 20,000 a month in mutual funds for 5 years?

Investing Rs. 20,000 monthly in mutual funds over a 5-year period can potentially accumulate significant wealth depending on the fund's performance and market conditions. If you consider that the mutual fund you are planning to invest in will give an average annual return of 12% p.a. then your future investment value will become approximately Rs. 16,49,727.

Can I invest in mutual fund for 7 days?

Mutual funds generally have a minimum investment duration, often longer than 7 days, with most funds intended for medium to long-term investments to benefit from market growth and minimise volatility.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.