Monthly Income Plans or POMIS
Anyone who has invested in Birla Sun Life MIP II -Wealth 25 Plan (G) a year back might be feeling satisfied after getting a return of 12.5% after one year and 10.7% annualized returns after 5 years compounded annually. Monthly Income Plan is considered as hybrid low risk investment product which gives positive inflation adjusted returns. By the name “Monthly Income Plan”, it look like a investment which would provide you consistent and equivalent monthly returns, but it is not the case with.
What are Monthly Income Plans
MIPs are debt oriented mutual funds which offers you returns that may be more than fixed deposit return as 70-80% portfolio is invested in gilt, government securities and corporate bonds etc whereas remaining 20-30% is either held in cash during bad times or invested in equities when there is expectation for the stock market to move up.
You can get income on monthly, quarterly or half yearly or yearly basis as you like. Normally the past performance of Monthly Income plan has nothing to do with future performance of MIP.
Who should Invest in Monthly Income Plans (MIPs)
Monthly Income Plan is ideal for investors who has moderate to low risk appetite and people with age group of 35-50. The basic funda of investing in MIPs is the negative correlation between debt and stock markets. The negative relation between debt and equity helps MIP to cancel out downside in one asset class against another.
But mind you, sometimes this correlation between debt and equity turns positive also. That is the time when MIPs gives low returns which are negative inflation adjusted.
Investment Options in MIPs
1. Dividend Option
The dividend option allows investors to get return on monthly or quarterly basis. The dividend received is non taxable in the hands of investors but the tax is payable by the mutual fund house before it is distributed to you. The NAV of the monthly income plans would be decreased by the amount of dividend declared by the fund house.
2. Growth Option
You get the power of compounding factor going your way if you go with growth option of investing in MIP as the money invested grows with time. You get to earn interest on interest.
3. Exit Option
MIPs generally have an exit load if you hold monthly income plan for less than one year. You are relieved from such expenses if you hold it for than 365 days of time
If you hold it for less than one year, you are liable to pay short term capital gain tax which gets added to your taxable income and taxed as per your income tax rate slabs. Long Term capital gains are taxed at 10% without indexation and 20% with indexation whichever is lower.
If you are looking to invest your money for short time period i.e 6-9 months, you might find MIPs as good investment option because short term fixed deposits might not pay you more than 7.5% returns which look quite low.
If you are a conservative investor and looking for return which is slightly better than fixed deposit, then also MIP should be a good option. But if you want to participate in upside in equity markets along with regular returns, look at an monthly income plans from a reputed fund house,’ says Anup Bhaiya, managing director, Money Honey Financial Services.
If I look at current market scenario where equity markets are looking to perform well or atleast remain stable and inflation rate also stabilizing and ample liquidity, I would expect MIP to perform better than fixed deposits. If you are earning more than 7-8 Lakhs and your taxable income is around 6-7 Lakhs and fall under higher tax slabs then you should prefer short term debt fund.
Few Points on Monthly Income Plans
- HDFC MIP and Reliance MIP are one of the best MIP plans in India which have consistently performed well over the past 3 to 5 years
- You can consider choosing growth option in MIP with systematic withdrawal option after one year to earn tax efficient returns. Whatever withdrawals you get from MIP would be tax free
- There is no limit of maximum amount to be invest in MIP which is Rs 4.5 Lakhs for Post Office Monthly Income Plans
- If you can handle volatility to a certain level, prefer to buy monthly income plan with long term track record
- There is no TDS on MIPs
Monthly Income Plans can be a good vehicle to buy equities at cheap prices while enjoying high accruals from fixed income instruments,” says A Balasubramanian.. All in all, this is a great option for investment especially when the stock market looks like to ride bull run at a low PE ratio of 16.5 and you may get better returns as compared to fixed deposits in the next 3 years.