Fund houses attempt to give regular dividends on their Monthly Income Plans (MIPs) but are not bound to declare them every month. So do not view this investment as a guaranteed return product. MIPs are hybrid investments, meaning they combine debt and equity in their portfolios. Thanks to the extra zing given by the equity allocation, their returns will be higher than that of a pure debt scheme.
Each MIP will have its own mandate on how much the equity allocation has to be (15-25%). The balance can be in debt and money market instruments. While the equity exposure adds some amount of risk to the overall product, it would be wise to check this allocation. If the exposure to smaller cap companies is large, that would make it all the more risky.
Look at the debt exposure too. MIPs with lower equity allocations tend to take slightly higher risk (interest rate risk) and go with higher duration portfolios. But aggressive ones (higher equity allocation) opt for shorter duration debt portfolios.
What investors should note
- Ultra-conservative investors or those who have retired and are living off their earnings and cannot afford to see a dip in their investments should not consider MIPs. Instead, consider a safe avenue like a post office monthly income scheme or bank deposit.
- The returns, like any other fund, are market-driven. You have absolutely no guarantees here.
- Though many fund houses strive to declare a monthly dividend, they have no such obligation.
- If you are not in need of any income, don't consider this type of fund. Instead look at a balanced fund.
- If you would like some sort of income but are not dependent on it for your bread and butter, then consider the various options available - monthly, quarterly, half-yearly or annual. In some instances, a growth option can be offered where regular dividends are not offered but capital appreciation is.
- Dividends declared under MIPs are tax free.
