Mutual Fund Monthly Income Plan(MIP) – Who should opt for it

I recently met an investor who 3 months back switched all his Equity Funds to Monthly Income Plans of various mutual fund schemes may it be HDFC, Reliance, Tata Etc. Curiously, When I asked him, he told that his Mutual Fund Advisor has recommended that you should shift all your investment to MIPs as markets are high and will get into Equity Schemes again when the markets will come down. I had a laugh. First, let me tell you what MIP is & latter I will tell you why that agent or many other agents are doing it.

What exactly MIPs are?

Monthly Income Plan or MIPs are debt oriented hybrid schemes where debt component is more then 70% to 95% and equity is 5% to 30%. The equity component provides MIPs with just the edge it needs to outperform conventional debts funds. Since the equity component is capped, this ensures that the MIP does not take on more risk. Different MIPs have different level of Equity component in it, starting from 5% in a conservative MIP to an aggressive MIP which has 30% equity in it.

Benefits of Monthly Income Plans

Benefit of both worlds -Stability of Debt and returns of Equity: Normally debt instruments may provide the safety and stability of regular income from coupon payments whereas equities provide the chance to earn an extra income through dividends and capital appreciation over a period of time.

Diversification: Since each asset classes have their own cycles, which at times may run in opposite directions, it pays to invest across different assets so to balance the portfolio. Majority of debt investments are into high credit quality papers.

Stable return: If we see the track record, MIPs have given stable return, though one have to watch out extreme bearish and bullish phase where return may misguide you.

Who should opt for Monthly Income Plan

If you are investing in MIPs for the reason that Equity Markets are high and this product is going to give you some comfort, you are actually going wrong here. To manage the volatility in Stock Market, one should go for Asset Allocation strategy rather than investing in MIPs. MIP are good for conservative investors and retired people looking for better return than traditional Fixed Deposits. If you are looking for regular income, use Systematic Withdrawal Plan rather than Dividend  Payout Option. Just make sure that you exercise such option only after 1 year of investment.

Taxation of  Mutual Fund Monthly Income Plan


Individual/HUFCorporateNRI*
Dividend in hand of investorTax FreeTax FreeTax Free
Dividend Distribution Tax13.84%22.15%13.84%
Short Term Gain^30.90%33.22%30.90%
Long Term Gain-Without Indexation10.30%11.07%10.30%
Long Term Gain-With Indexation20.60%22.15%20.60%
^Assuming the investor falls into the highest tax bracket.
*TDS will be deducted at time of redemption in case of NRIs.

These benefits & its name has generated some myths around Monthly Income Plans

1. Does MIP offer Monthly Return/Income: The answer is that they are meant to give investor a regular income but there is no such guarantee that the monthly returns will be there. The return from MIP is typically taken in the from of dividends which investors understand as TAX Free. But it is better to withdraw a certain sum of money froom such scheme rather than opting for dividend option. There is a Dividend Distribution Tax (DDT) which fund deducts from your dividend income before it comes in your hand.  The Tax rate for DDT for Resident Indian is 13.841% whereas if you were to withdraw by way of Systematic Withdrawal Plan (SWP), the tax liability is maximum of 10% (after 1 year) and that too if you are paying tax at 10% or more.

2. Guaranteed Return: The aim of MIP is to protect the capital and give consistent return but at any point in time, there is no guarantee in this product. In fact, SEBI does not permit any AMC to give an sort of guaranteed return product. Though the chances that MIP will give negative return are low hence a safer product Though many investor belief that MIPs will give 12-15% guaranteed return year on year which is not true. Though, if you look at return chart, there are reasonably good return but they are not guaranteed.

3. Regular Dividends: Though fund manager try to give regular dividend but it is again not certain. MIPs have often missed many dividends especially when equity markets are not performing. Also with the regulating of SEBI allowing dividends from EARNED income only, makes the job of fund manager more difficult. Now at any point in time, dividend cannot be more than the growth in NAV. As advised, its better to work on SWP rather than looking for dividends.

4. No principal Loss: Though chances of MIPs giving negative return are very low but it cannot be eliminated.

Return in Monthly Income Plan (Best MIP)

Monthly Income Plan: Long-term Performance (Return % CAGR)
Type of MIPFund Name1-Y3-Y5-Y
Maximum Equity 15%HSBC MIP Savings9.829.6811.03
Birla Sun Life Monthly Income9.229.0410.27
Equity 15% to 20%Reliance MIP13.0115.0412.97
Canara Robeco MIP9.889.4912.86
Equity 20% to 30%HDFC MIP Long-term14.0312.5313.02
Principal MIP Plus6.6910.0310.17
(as on September 25, 2010)

Why Agents are Mis-selling MIPs now a days

After the ban of entry load since August 2009, Suddenly MIPs have become one of the most recommended product by Mutual Fund Distributors. Is MIP one of the best product for investor? Frankly speaking, the intention of distributors is not to offer the best product to investors but the intentions is to make the most from the clients. MIPs now offer more commission to mutual fund distributor than Equity Funds STP (Systematic Transfer Plan) to Equity through MIP is again a very expensive thing for investor but very lucrative for Agent.

From the last 1 Year, the corpus of MIP schemes have seen a huge inflow all over India. Last year, the total industry AUM was close to Rs. 3700 crore and today it is well over 24500 crore. In this entire period, equity funds AUM have gone down. Now when the intentions itself are not good, needless to say that the outcome will be right. Many investors are not aware that there is an EXIT Load of 1% in almost all MIPs if you were to withdraw before one year & in some cases even 1.5 years.

Make no mistake in choosing MIPs. It is better to invest only if you need it. Don’t use it as parking investment as it could be costly mistake.

Previous articleBenefits of Mutual Fund
Next articleDo you really understand SIP(Systematic Investment Plan)
Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.

54 COMMENTS

  1. I have the same query as of Mr. Sunil Sikka,
    I have bought HDFC MIP, should I switch into Reliance MIP or should I stay with HDFC MIP…please reply

  2. Good article. Understood why agents are recommending the MIPs.

    what is the procedure to know the agents commission in the mutual funds ? is there a web site or any other way of investors getting education on this matter ?

    Greatly appreciate

    • Hi Sidd,

      As such you will not find any website or other source that declares commission that mutual fund agent gets. But SEBI has made it compulsory for your agent to declare his earnings – not only the fund he is recommending you but all the funds that he deals in. In any mutual fund application form where you sign; you will find these lines “The ARN holder (AMFI registered Distributor) has disclosed to me/us all the commissions (in the form of trail commission or any other mode), payable to him/them for the different competing Schemes of various Mutual Funds from amongst which the Scheme is being recommended to me/us.” So next time before signing the form you can ask him to show his earnings.

    • Sir,
      Can you pl.guide me which is the best investment planWhich will give me best monthly returns with minimum risk where i should invest and what are bench mark and maxium limit of the investment for indivisual.

    • Hi Jay,

      MIPs are giving negative returns because equities markets have sharply corrected in couple of weeks.(MIPs have 20-25% amount in equities) Even debt is giving negative or zero return due to increasing interest rate scenario.

    • Hi Jay,

      There is a negative co-relation between price of the bond(debt) & interest rate. when interest rate increases bond price comes down & vice versa.

      For Eg. you are holding a bond which gives you interest of 8% – but next year interest rate increase to 9%. So your bond will loose it’s price(will sell in discount) as it’s giving lower return – when compared to new bond.
      Hope it clarifies your query. 🙂

  3. what an informative article..my question is what is systemic withdrawal plan is different from MIP and whether it available as an option in Mutual fund or is this a entirely different plan(different from MIP bond)

  4. very nice article..i love it..
    i have a query..how SWP is better than MIP..isn’t it they are same? SWP has a different form or is it available as an option in MIP form.

    • Hey Adesh,

      Don’t confuse SWP with MIP – SWP is a feature that can be added to any mutual fund. It works just opposite of SIP – In SIP you invest regularly & SWP(Systematic Withdrawal Plan) you withdraw regularly.

  5. Dear Hemant. B,

    well, I got t o register for e course @ tfl
    now, i would like to learn about indexation,and benefit of it without indexation.
    asset allocation.
    is SWP an option in a SIP.
    tax benefit of SIP .? capital gain after 12 months
    when to opt for REdemption /refund claim of SIP.
    sure, i do get to learn from your Expertice.

  6. Do Indicativ Yields of consecutiv FMP NFOs (from any AMC in general,say HDFC/Reliance MIPs) hav negative co-relation with interest rates(i.e.,when interest rate increases,bond price comes down along with Indicativ Yields of FMP & vice versa) just lyk u hav xplaind abov in case of MIPs? If that is true,then in a rising interest rate scenario now(as also indicated by RBI etc mainly 2 try 2 ctrl inflation), isn’t it wiser 2 start switching from 1) Equity Instruments in general (-where corporate margins historically hav suffered) & 2) MIPs into FMP(NFO)s (-where ur Indicativ Yield is locked in higher earlier than lower later especially in a rising interest rate cycle now or is it vice versa or is ther no established proven co-relation in case of FMP returns) ? Also,is ther any such historical comparabl data 2 elaborately xplain this co-relation during earlier rising & decreasing interest rate cycles? Pls reply asap,Thanx again Sir.

  7. HELLO,MY UNCLE IS RETIRING WITH RS 20 LAKH HAND CASH(CORPUS) AND A PENSION OF RS 25,000 PER MONTH AND STAYS ON HIS OWN HOUSE NOW WHAT HE CAN DO WITH THE 22 LAKH HANDCASH?IS IT FAIR TO OPT FOR MUTUAL FUNND MIP LIKE HDFC MIP?PLEASE HELP

    • Hi Rahul,

      My suggestion is you should ask your uncle to go for proper retirement planning. What I can see is he can take some more risk & park some amount in even diversified equity funds.

    • Hi Pradeep,
      MIP & Balanced funds are differentiated by equity exposure in their total portfolio – MIP have 20-25% equity & Balanced funds have 65% equity.
      There is no comparison between MIP & SIP – will suggest you to join free E-course.

  8. Well explained hemant……..
    My agent too shifted lot of funds from equity to debt and MIPS IN SEPT END
    last year…I am invested in hdfc,FT, and Reliance MIPS and they have somehow under-performed this yr somehow giving2-3 percent returns..Now since 12 months are about to pass, should I now switch out,I was also waiting for the dividends at the end of this qtr..are they expected???
    PLEASE ADVICE

  9. Dear Hemant,

    I am 41 yrs old and under 30% tax bracket. I have a cash surplus of approx 6/7 lacs. How should I treat this corpus in near terms of 12-15 months as I would need it about than for real estate purchase.

    regards

    Shashank Selot

    • Hi Shashank,

      I will suggest you that you should keep Rs 1 Lakh in your bank account for emergency purpose. As you are mentioning that you will require the amount after 12-15 months for the real estate purchase I will suggest you the remaining amount should be deposited in Bank Fd’s which will provide you a return around 9% for a year.

      • Dear Hemant,

        Thanks for the advice. What would be your advice on FMP or liquid funds as a comparision with bank FD.

        regards

        Shashank Selot

  10. I found this topic very interesting. I am PSU employee aged 46yrs. My query is what % of investment must be done in good MIP plans from now onwards to build a good conservative corpus for retirtement & daughter’s marriage in a 5 yrs from now.

  11. Hi Hemant,
    I am advised to invest 60% in Canara Robeco Equity Diversified growth,
    20% in HDFC mid cap opportunities fund – growth &
    20% in SBI Magnum sector funds umbrella – emerging buss fund growth. My investment will be of Rs 5000 P/M. Is it a good combination ? or you have other suggestions. Pl advice.

  12. Hi Hemant,
    I am a first time investor (Age 24) and my Fund Advisor has recommended me the UTI Dividend Yield Dividend plan, which as I understand, is akin to an MIP. I personally preferred the “Growth” option but my advisor tried to convince me by suggesting that as a first time investor, I would ideally want to”see”my returns as otherwise he feared I may lose interest. What do you think would be the better thing to do? My time horizon is less than 5 years.

  13. Hi Hemant ,
    I’m 24 old and got a job 1yr ago. I’m interested about MIPs. But I’m completely new to this area. Please help me understand…

    There are few things that I don’t understand about MIPs.
    1. How I can earn money at monthly basis through MIPs ? Is it via dividend ?
    2. Do I have to invest money only at the time of entry ? Can I increase my investment ?

  14. Another way to look at MIPs is that if you are in need of cash say approximately 2 years to 3 years later and not sure what the market will do. Investment could be made coz the market has got the habit of surging upwards unexpectedly, if that happens your goal could be met much early due to the equity exposure but you have to keep a track and not be greedy for more. I would suggest to put money in such MIP whose equity exposure is not more than 20%. Otherwise you might get the normal 6 to 7% returns even in difficult times. This is my way of thinking. I could be wrong but would like to read more.

  15. I maintain Rs. 2 lakh as an emergency fund. Normally I use the fixed deposits for it. Can I put some portion of it in MIP?

    To put it in another way, will it be tax friendly to park a portion of contingency fund in an MIP? I am in 30% tax bracket.

    Also, if the MIP is a way to go, should I go for dividend or growth option?

  16. Hi ,

    I would like to invest approx 8 lakhs in mip , please suggest the approx return i would get from reliance MIP on amonthly basis as a divident and if I opt out afterb 3 years will I get my principle amount back

  17. Hello,

    Can u pl briefly explain how the FMP are better than Fd’s from taxation point of view?
    if I want better tax free income(since I am tretd) what u will recommend

  18. Hi Hement,

    This is beautiful / analytical explanation for those who want to seek regular return especially for the retired & sr citizens. Keep informing such info .
    Regards,
    shrikant

  19. Hi Hemant,
    I am new to this area. I am 50 years old and coming under 30% Tax Slab.
    As I am planning to invest 15 -25 thousands per month in MF / MIP/ SIP with envisaging my happy retirement life, It will be very useful to me if can you please suggest how much in which fund I can start investing.

    Thanks in advance.
    Sekar

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