Nature of investments
Most of the Monthly Income Plans invest in high quality debt instruments thus ensuring that your money invested is safe. They might also allocate some portion of the proceeds in equities, though this would not be more than 20 per cent of the funds. This may help to generate slightly superior returns than the traditional fixed deposits.
Types of investment
MIPs offer two types of schemes. One would be the growth option, while the other would be the regular dividend option. The dividend option may further have an option of monthly, quarterly or yearly dividends. In the growth option an individual could redeem his or her units at the net asset value prevailing as on the date of redemption.
If you opt for the dividend option, you would not have to pay any tax, as dividend is tax free in the hands of the investors. However, the Mutual Fund has to pay a dividend distribution tax, which means your dividend gets reduced automatically due to the tax paid.
On the other hand if you opt for the growth option than you have to pay a long term capital gains tax, which has currently been enhanced to 20 per cent for non equity funds. So, any which ways there is a tax liability that has to be dealt with.
Dividends to be declared from surplus only
Dividends from MIPs need to be declared only from surplus. Hence, if the NAV is higher then the offer price, there is scope to declare dividend. Otherwise, there remains no scope for dividend declaration.
With the tax liability on MIPs, the returns generated would be more or less in line with other fixed yielding instruments like bank deposits. Also, the recent change in long term capital gains rate and tenure in the Union Budget has put a spoke in the wheel for such investments. It's also easier and faster to redeem bank deposits online. Go for Monthly income Plans only if you would like to diversify your debt portfolio.