As the stock market in India moves into overbought territory, it is becoming increasingly expensive and unaffordable for small investors to enter. The effects of a continuing global slowdown and the exit of the United Kingdom from the European Union are also likely to play out in the coming quarters and cause volatility.
Investors with an appetite for growth who are looking for more stable avenues than equity at such a time can consider monthly income plans (MIPs) offered by mutual fund houses. India Post also offers a monthly income scheme (MIS). MIPs are debt-oriented hybrid funds and can be a replacement for fixed deposits if you have a large lump sum that you are looking to invest.
“MIPs are debt instruments with an equity component of up to 25 per cent. This helps MIPs assure a marginal safety of capital and deliver better returns as compared to other debt instruments. PO [post office] MIS, on the other hand, is a low return yielding instrument with 7.8 per cent taxable returns,” says Dinesh Rohira, founder and CEO of 5nance.com. “One should invest in PO MIS if the dependence is largely on the interest earned. Investment in MIP is a low risk and moderate return proposition. It delivers optimised returns by earning the interest from debt investment, plus an additional boost to your returns from equities.”
Given their exposure to equities, MIPs yield better returns over other debt funds where the exposure is restricted to debt instruments only. Rohira says MIPs have earned 10-11 per cent returns over the last one year and a category average of 12 per cent for three years. “It beats other debt categories of investments by more than 100-200 basis points in a given time frame,” he says. A basis point is one-hundredth of a percentage point.
What adds to their attractiveness is their potential to generate income on a monthly, quarterly or half-yearly basis and offer a second source of earning. As on June 30, the CRISIL-AMFI MIP Fund Performance Index gave returns of 11.02 per cent on a three-year basis, 9.73 per cent on a five-year basis, and 9.61 per cent on a ten-year basis. The corresponding returns for the CRISIL-AMFI Income Fund Performance Index were 7.27 per cent, 8.68 per cent and 8.25 per cent.
However, one must exercise caution as MIPs do not guarantee income at regular intervals and the payout is made at the discretion of the fund house in the backdrop of market conditions. “Although not guaranteed, the portfolio is constructed and managed to pay regular dividends to its investors at fixed intervals,” says Anil Ghelani, senior vice president at DSP BlackRock Investment Managers. “While in the past there have been certain periods where MIPs have delivered stable accruals, the returns from these funds are subject to market risk and hence it would not be prudent for the investors to create dependency on the same.”
The risk of irregularity in cash flow can be lowered by opting for a systematic withdrawal plan (SWP). For investors choosing an SWP, the fund house will have to keep paying out the stipulated amount even at times when the scheme is incurring losses and even if it requires taking a slice off the principal. As a result, the SWP is an effective option only for those who have a sizeable sum to invest. Investors who choose the dividend option will be paid dividends when the scheme generates a surplus and it is conducive for the fund house to make a payout. Dividends on MIPs are paid after making a deduction for dividend distribution tax (DDT) at the rate of 12.5 per cent, cesses and surcharge. MIPs are treated as debt funds and taxed as such.
For those selling their units after more than a year of investment, long-term capital gains (LTCG) will be taxed at 10 per cent without indexation and at 20 per cent with indexation, which refers to the process of adjusting the amount for inflation. Short term capital gains (STCG) are taxed at the relevant rate of income tax. The SWP option entails payment of both LTCG and STCG, but the latter can be avoided if the investor signs up for SWP after having stayed invested for a year.
Who, then, should sign up for an MIP? Experts say that it is suitable for first-time investors because of the in-built asset allocation and for retired individuals who need a steady income. “Retirees across various age groups who seek a stable and regular income are one segment of prospective investors in MIP,” said D.P. Singh, executive director and chief marketing officer for the domestic business at SBI Mutual Fund. “NRIs who want an option to guarantee a regular cash flow to their dependents back home in India can choose an MIP. Professionals working outside their home locations and having parents and family to support can opt for MIPs to cater to their monthly cash needs. Finally, as we have seen, high net worth individuals who want to focus on their business or professions without worrying about providing a stable income flow for their dependents choose this product by providing a lump sum amount for sustenance.”
That encompasses quite a swathe of investors, but individual investors must keep assessing the suitability of the product for their particular needs. Singh says, “Most investors regard their investment in MIP as a pension plus product. They invest a lump sum amount and start their SWP to ensure a regular income. There are several examples where investors like pensioners and HNIs have used this option for their benefit. However, we always encourage them to review their position every six months.”
