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Among the various types of debt funds available in the market, one of the most popular has been the Monthly income plan or MIP. While MIPs as a debt product gives higher returns than traditional bank FDs, they are not an assured return product, as is normally perceived. Let us delve deeper into MIPs.
At the outset, MIP is not an assured income product nor a recipe for getting higher returns. MIPs outperform traditional avenues of fixed income investments like bank FDs and corporate FDs but they come with their own set of risks.
An MIP is a debt oriented fund that pays out dividends on a regular basis. The choice is yours and you can either opt for a monthly income plan or a quarterly income plan depending on your need. However, it must be noted that MIPs only give an in principle commitment to distribute dividends, although MIPs are only allowed to distribute dividends to fundholders only out of the income earned on the instruments held by them. They cannot pay dividends out of capital.
In terms of asset mix, MIP invests mainly in debt instruments and a small portion of 20-25% in equity. Why this equity component and does it not impact predictability? The equity is for the alpha and thus enhances the returns on the MIP compared to traditional debt funds. However, the substantial debt portion is sufficient to pay out the regular income.
In the recent past, MIPs did lose a lot of their attractiveness due to the dividends being made fully taxable in the hands of the investor. However, many funds do structure these pay-outs as systematic withdrawals or as SWPs so as to make the MIPs more tax efficient. That way, there is also no restriction on pay-outs of dividends.
Conceptually, MIPs are debt funds that are predominantly invested in debt with a small component in equity for alpha. However, they give a commitment of regular income payment and that makes it attractive for retired persons who rely on their investments to earn them income on a regular basis. Here are some major highlights of the MIP.
Remember that the Income Tax Act, for the purpose of taxation of mutual funds, only makes a classification of equity funds versus non-equity funds. MIPs would classify as non-equity funds. They are subject to tax at different points like other non-equity assets.
A couple of points to remember here. On the one hand, dividends on MIPs are not technically assured, but as a matter of policy most MIPs make it a point to pay out regular dividends to take care of the market expectation. This product makes a lot of sense for retirees and others seeking regular income as MIPs give above average returns.
Therefore investors seeking regular income and an investment horizon of 3-4 years, can invest in MIPs. They have worked as the best option in terms of risk-adjusted returns. However, MIPs are subject to mis-selling so don’t buy the assured returns sales pitch. However, with SWP structuring, they can still be a good instrument.
Remember, dividends on MIPs are not technically assured but as an unwritten principle, MIPs do tend to ensure that dividends are paid out at regular intervals. If you are looking at a conservative asset class with some alpha from equities, then MIPs are a really good option. You should ideally structure it as a SWP to make it tax efficient.
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