MIP- A debt option all can consider!
A Monthly Income Plan a.k.a MIP is a debt oriented fund offered by mutual funds which primarily invests into debt securities like commercial paper, government bonds, treasury bills etc while maintaining a certain percentage of about 15% – 25% in the equity market. As opposed to a debt or income fund, which invests solely into debt thus offering low rate of return or a balanced fund which invests almost equally in debt and equity.
MIP is meant for the investor who is not willing to take high level of risk, but is interested in a slightly better return than pure debt funds or bank FD. The high level of investment in debt gives one a low risk profile while the minimum exposure to equity helps push the returns higher.
Like all MF scheme, an MIP also has 3 options:
Dividend payout option - An MIP can be tuned to provide you with a regular monthly/quarterly/semi-annual/annual income. This is in the form of dividends and hence tax free in the hands of the investor. However, the fund house declaring the dividend pays Dividend distribution tax of 14% and the amount received by you is after this payment. Also despite choosing a payout option, an MIP does not guarantee regular payment of dividends as this depends upon the performance of the fund house. Hence, if you do not receive regular payments, do not be aggrieved as it could be due to unforeseen underperformance.
Dividend reinvestment option - This is where the dividend is allocated to all unit holders but not paid to them. Instead more units are bought by the fund manager for them. The dividends are thus re-invested.
Growth option – In this case, dividends are not paid out but they grow within the fund itself and it can be redeemed at a later date in the future. This allows you the magic of compounding, i.e. the earned income also earns further income thereby creating a huge corpus.
Features of MIP:
No guarantee of regular income: An MIP is often mistaken with an income fund which provides you with guaranteed monthly income. Fund houses aim to provide you regular dividends though sometimes it may fail to do so due to bad performance.
Returns: An MIP despite being a debt fund is not completely safe as the returns of an MIP are linked to the market. The return on the debt portion of an MIP is linked to the prevailing interest rate.Hence if the rate of interest falls, the bond price will rise, thereby leading the NAV to rise and vice versa.
The equity portion of the MIP is linked to the market and it is this return which helps to sustain the fund when the interest rates rise in the market leading to a fall in NAV.
Loads: As all mutual fund schemes, MIP too is subjected to loads. Recently the entry load on MIP’s was abolished. However, there still exists an exit load of 1% in case of withdrawal before the end of 1 year and in some fund houses 1.5 years.
Taxation of MIP’s
Dividends received: Dividends received from any mutual fund scheme are tax free in the hands of the investor. However, these dividends are after the payment of DDT by the fund house which has ultimately been cut out of your dividends.
Short term capital gain: In the event of redeeming the units within a year, the gains will be added to your taxable income and taxed at slab rate. Hence, for those falling in the highest tax bracket, it is advisable to sell upon completion of a year.
Long term capital gains: upon sale after a year, the gains will be taxed at either 20% with indexation or 10% without indexation, whichever is more beneficial to you.
MIP’s make for a great investment option and can be definitely added to your investment portfolio if you are looking to earn a stable income with moderate growth. It is a must especially for retired persons. However, to ensure you do suffer from lack of any income incase the fund house under performs, it is always advisable to diversify and invest in several other instruments. Also keep in mind that MIP's should be invested for a period of 3 years as there is an equity component in it. Only then do these funds help you. This will help keep you and your loved ones financially secure.
By Shalmali Kulkarni.
The writer is working as a para-planner with Fpguru.com
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