A hassled wealth reader enquired about Monthly Income Plans (MIP). His concern was that he hasn't been getting any monthly payments (income/dividends) from the fund he had invested in. He has already made huge loss in the fund and withdrawing from the plan would mean a greater loss.
Wealth takes this opportunity to tell you all you wanted to know about MIPs
A general misunderstanding about MIP among investors is that it is believed to offer regular monthly income. From the name you may infer that MIP gives you monthly returns, but that's not the way it functions. An MIP is generally mistaken for a regular income plan; but actually, it gives you returns based on market's performance.
What is MIP?
MIP is a hybrid investment that invests a small portion of its portfolio, around 15 to 30 per cent, in equities, and the remaining in debt and money market instruments. This plan is ideal for those who score low or medium on their risk profile.
What are the features?
MIPs are products that give you market-linked returns. This means when the equity market is performing well, it will give you moderate returns, thanks to the 30 per cent equity component. But when the tide turns, your returns are limited to the debt component. This fact comes out clear especially, in the current market situation.
MIPs score better on the tax front when compared with other debt instruments such as postal savings and bank deposits. The dividend income is tax free whereas interest from postal savings and bank deposits is taxable.
But there is no guarantee that it will give you assured returns like its counterparts. Investors in the highest tax bracket can add MIPs to their portfolios if they are looking better post-tax returns compared to bank deposits. It is a good choice provided you are not totally dependent on it. Since stock market is a volatile business, don't expect continuous income.
If you do not like taking much risk and are looking for better post-tax returns, then MIP would fit in your portfolio because 70 per cent is invested in debt. This lends security to your principal while the 30 per cent equity component can give returns a boost.
But if you are looking at regular flow of income, and are depending on that income for financial stability, MIP is not meant for you; it’s better to look for alternative.
1. It is no harm to add MIP to your portfolio provided you are not expecting continuous flow of income. It can just be another variant of a debt fund.
2. If investing in MIP, check the dividend history and its past performance.
Wealth takes this opportunity to tell you all you wanted to know about MIPs
A general misunderstanding about MIP among investors is that it is believed to offer regular monthly income. From the name you may infer that MIP gives you monthly returns, but that's not the way it functions. An MIP is generally mistaken for a regular income plan; but actually, it gives you returns based on market's performance.
What is MIP?
MIP is a hybrid investment that invests a small portion of its portfolio, around 15 to 30 per cent, in equities, and the remaining in debt and money market instruments. This plan is ideal for those who score low or medium on their risk profile.
What are the features?
- Returns
MIPs are products that give you market-linked returns. This means when the equity market is performing well, it will give you moderate returns, thanks to the 30 per cent equity component. But when the tide turns, your returns are limited to the debt component. This fact comes out clear especially, in the current market situation.
- Tax
MIPs score better on the tax front when compared with other debt instruments such as postal savings and bank deposits. The dividend income is tax free whereas interest from postal savings and bank deposits is taxable.
- Safety
But there is no guarantee that it will give you assured returns like its counterparts. Investors in the highest tax bracket can add MIPs to their portfolios if they are looking better post-tax returns compared to bank deposits. It is a good choice provided you are not totally dependent on it. Since stock market is a volatile business, don't expect continuous income.
- Ideal for?
If you do not like taking much risk and are looking for better post-tax returns, then MIP would fit in your portfolio because 70 per cent is invested in debt. This lends security to your principal while the 30 per cent equity component can give returns a boost.
But if you are looking at regular flow of income, and are depending on that income for financial stability, MIP is not meant for you; it’s better to look for alternative.
- When to choose MIP
1. It is no harm to add MIP to your portfolio provided you are not expecting continuous flow of income. It can just be another variant of a debt fund.
2. If investing in MIP, check the dividend history and its past performance.
