MONTHLY Income Plans (MIPs) launched by mutual funds are a good portfolio choice for investors with a moderate risk appetite. These schemes are open-ended funds and seek to provide regular income to investors. MIPs invest in a judicious mix of fixed-income instruments (bonds) and equities, with most of its investments into bonds. The scheme's asset allocation is such that under no condition, the equity allocation is allowed to cross 5-15% of the total money managed. A slightly more aggressive version of these plans allows the equity component to go up to 25-30% of the total money invested. The new avatar of MIP also incorporates gold as an asset class in the portfolio. Here the fund manager has to juggle between bonds, equities and gold to generate regular income.
Since the focus of the scheme is to generate regular income, the fund manager of an MIP builds the portfolio that is aimed at protecting the capital and generating regular income. The equity component is aimed at boosting the returns payable on bonds portfolio. In most cases, the portfolios are rather conservative and make a good vehicle for those who are keen to enjoy regular income. It is also good for those who are not willing to take risks associated with a pure equity fund but are comfortable putting in a small amount of money into equities.
A point to note is that MIPs, like any other mutual funds, do not assure returns. Neither do they assure the frequency of the dividend nor the rate of dividend to investors. Declaration of divided is at the discretion of the fund manager. The funds offer two options to choose from – growth and dividend. Those seeking a 'regular income' should opt for the dividend option while the growth option works for the rest.
In case of MIPs, long-term capital gains are taxed at 10.3% without indexation or 20.6% with indexation, whichever is lower. Dividends are free in the hands of the investors after the fund houses deduct dividend distribution tax of 13.84% on dividends payable. Before investing, an individual should understand asset allocation well.
