Monthly Income Plan: Investment that generates income, capital appreciation

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    Monthly Income Plan: Investment that generates income
    If your aim as investor is to generate income and capital appreciation at the same time Monthly Income Plans (MIP) can prove to be a good option. MIP's are funds offered by various mutual fund houses and they are structured to achieve two objectives.

    The primary objective is generation of regular return through investment in Debt and Money Market Schemes. Secondary objective is generation of long term capital appreciation by investing a portion of funds in Equity market. These funds have long term time horizon and are more tax efficient as compared to fixed deposits.
     
    What are MIP's?

    Monthly Income Plan (MIP) is debt-oriented mutual fund scheme that generally invests 75% to 80% of its corpus in debt instruments and the remaining in equity related instruments.
    The debt part ensures consistency, stability and safety of capital while equity part helps in enhancing returns through capital appreciation.
     
    Important Features of MIP
     
    1.     MIP's offers investors an option to invest in debt as well as equity
    2.     MIPs are suitable for investors who have nominal risk profile. The debt part provides regular income while the equity portion provides extra return. However, returns might get eroded by a fall in market sentiment 
    3.     MIP's can be classified into Aggressive MIP and Conservative MIP based on portion of equity allocation. Larger the equity portion more aggressive is the MIP.
    4.     MIP's are better if you have longer time frame for investment. Historically equity has given better results in long term.
     
    MIP's Income Option

    MIPs income is in two forms i.e. dividends and growth (capital appreciation). Dividend payout options available typically range from monthly, quarterly, half-yearly and yearly. These dividends are paid post deduction of dividend distribution tax and are tax free in the hands of investor.

    Another option MIPs offer is growth option where the return is not in form of dividend but capital appreciation. If investments are held for one year or more, the capital gains are subject to indexation resulting in higher post tax returns.
     
    Factors affecting the income of MIP

    As investment corpus is divided into two parts (Debt and Equity) factors influencing the overall return are the interest rates scenario (Debt Part) and the overall economic condition (Equity Part).

    When the interest rate falls, the NAV rises because of capital appreciation due to bond price increase. Similarly the NAV falls when the interest rate increases.

    Performance of equity part is more volatile and is dependent on the overall economic scenario and the stock portfolio selected by the fund house. In long run the potential of capital appreciation is substantial because of the equity part.      
     
    Tax Efficiency of MIP's
     
    Tax calculation depends on the type of income option selected by the investor. For Dividend option, dividends in MIP are paid post deduction of dividend distribution tax at the rate of 13.52%. No tax is levied on the investor post distribution and amount received by the investor is tax free. Point to note here is that the income is taxed at the rate of 13.52% in the hands of mutual fund house and is not actually tax free
     
    In growth option the return is taxed as capital gains and is eligible for benefits of indexation. In the case of long term capital gain investor pays tax which is lower of the following
     
        10% plus surcharge plus education cess, without indexation
        20% plus surcharge plus education cess, with indexation
     
    Indexation means cost of acquisition is adjusted upwards to take into consideration the impact of inflation. Government declares the indexation figures every financial year which can be used to calculate the tax for particular financial year.

    Calculations suggest that annualised returns with or without indexation for MIP's are better than the bank fixed deposits in long term hence MIP's can prove to be good investment avenue for investors with nominal risk profile.

    InvestmentYogi.com

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