Monthly Income Plan- A Quick Guide to Monthly Income Scheme

Monthly Investment Plan (MIP) is an investment instrument specially designed for conservative investors. If you are worried about the risks involved in stocks and want to play safe, read on to know about MIP in this quick guide.

Decoding Monthly Income Scheme

Monthly Income Schemes are mainly debt-oriented. More than 70-% of its fund goes into debt funds. The rest of the fund is invested into stock options. The main objective behind it is to earn stable returns through equity whenever possible.

What are Monthly Income Plans?

Mutual funds, like any other investment scheme, bear a certain amount of risk. Quite often, traditional investors are sceptical of the risks involved in them. Such investors can opt for a Monthly Income Plan (MIP), a comparatively safer scheme. MIP is a debt-oriented mutual fund that gives monthly income according to the fund's performance. MIP comes under the Hybrid Mutual Fund category and aims to provide an alternative source of periodic pay-outs to the investor.

Benefits of Monthly Income Plan

A Monthly Income Plan is ideal for pensioners and small investors who want to have an alternate source of income with minimal market-related risks. Although similar monthly income schemes (MIS) are available in Post-Office and banks, following features of MIP give it an edge over other schemes:

  • Safer Investment:

    Being a debt fund, MIP bears a comparatively lower risk. There is no limit on investment for MIP.

  • Minimum Overheads:

    You don't have to pay any processing charges and exit load charges cannot exceed 1%.

  • Better Returns:

    Returns on investments in MIP is generally higher than that offered by Fixed Deposits (FDs) and MIS schemes of Post-Office.

  • High Liquidity:

    Unlike a few other investment options, there is no lock-in period for MIP that results in high liquidity.

Types of Monthly Income Plan

According to the way they handle returns, you can divide the mutual fund monthly income plans into the following two types:

  • Growth-based MIP:

    In this plan, instead of paying the profit back to the investor at regular intervals, it gets added to the capital. As the profit gets accumulated, your corpus grows. Although this MIS does not give you a steady inflow of profits, it results in wealth creation.

  • Dividend-based Monthly Income Plan:

    Under this scheme, you get dividends in the form of periodic pay-outs. You can choose to receive the pay-out monthly, quarterly, half-yearly, or annually while buying Monthly Income Plan

Are There Any Tax Implications for Monthly Income Plan?

Since Monthly Income Plan is a debt-oriented mutual fund, your earnings under this scheme are taxable as explained below:

  1. Tax on Dividends:

    Although an investor does not have to pay any tax on dividends, the company levies a Dividend Distribution Tax (DDT) of ~ 25% (plus surcharge and cess) while dispensing dividends for an investor. Effective DDT works out to be 29.2%. For example, if a mutual fund declares a 100 paise per unit dividend, the investor receives only 70.8 paise as 29.2 paise goes towards DDT.

  2. Tax on Capital Gains:

    • Tax on Short Term Capital Gains (STCG): If you dispose of the mutual funds in less than three years, its profits are liable to be taxed as per your income tax slab.

    • Tax on Long Term Capital Gains (LTCG): However, if you retain the mutual funds for more than three years, the profits invite a tax of 20% after indexation.

Who Should Consider Investing in Monthly Income Scheme?

Now that you are aware of the MIP types, its advantages, and taxes, should you buy them? MIP is a low-to-moderate risk monthly investment scheme viable for the following investors:

  • Traditional Investors Seeking Better Returns:

    If you are used to investing in Fixed deposits or post offices and getting ~6-8% returns, you can switch to a monthly investment scheme. The returns on these low-risk schemes usually lie between 10-12%.

  • Investors looking for alternative sources of Income:

    If you are a retired or semi-retired professional, MIP can serve as a back-up source of income in addition to your pension. You can utilize the periodic paybacks from these schemes to meet your contingency expenses.

  • Monthly Investment Plan for a Safer Future:

    The future is unpredictable, and it doesn't hurt to have an alternate source of income for unforeseen situations. This short guide gives you an introduction to the monthly investment scheme as an additional source of periodic income. Being a low-risk instrument, it can be your stepping stone into the world of market-based investments.

Factors to consider before investing in Monthly Income Schemes

  • Financial Goals Individuals want to achieve in short-term and long-term

  • Pay-out options available within the Monthly Income Scheme

  • Time horizon of the investment

  • Potential of wealth generation of the scheme

  • Tax benefit offered by the Monthly income scheme

  • How much risk is willing to be taken by the individual

  • Current financial situation of the individual who wants to invest

Should You Invest in Monthly Income Schemes

There are many monthly income schemes in India. So, individual should do his own research before selecting a particular monthly income plan. An individual should know his financial goal and his requirements before investing his money in a monthly income plan.

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