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
|Dividend in hand of investor||Tax Free||Tax Free||Tax Free|
|Dividend Distribution Tax||13.84%||22.15%||13.84%|
|Short Term Gain^||30.90%||33.22%||30.90%|
|Long Term Gain-Without Indexation||10.30%||11.07%||10.30%|
|Long Term Gain-With Indexation||20.60%||22.15%||20.60%|
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 MIP||Fund Name||1-Y||3-Y||5-Y|
|Maximum Equity 15%||HSBC MIP Savings||9.82||9.68||11.03|
|Birla Sun Life Monthly Income||9.22||9.04||10.27|
|Equity 15% to 20%||Reliance MIP||13.01||15.04||12.97|
|Canara Robeco MIP||9.88||9.49||12.86|
|Equity 20% to 30%||HDFC MIP Long-term||14.03||12.53||13.02|
|Principal MIP Plus||6.69||10.03||10.17|
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.