Tuesday, 17 April 2012

Monthly Income Plan-MIP: Should You Invest?

renjith krishnan
Monthly Income Plan or MIP is debt oriented scheme where debt component is in the range of 75% to 80%. Investment is made in instruments like Govt Securities, Certificate of Deposits, Bonds with Good rating, etc.  Around 20% to 25% is invested in equity. Investment in debt component provides required stability where as equity component will help in generating better returns.MIP is ideal for Conservative investors who are looking for better returns than bank FDs.
Is MIP Risk Free?:
MIP has an element of risk associated with them. This is mainly due to equity exposure (20% to 25%).In addition to risk associated with equity component, MIP are affected due to change in the interest rates.If there is raise in interest rates, the bond prices decrease, there by the NAV is negatively impacted. This is when Fund Manager shifts the focus more towards equity, depending on the market conditions the Fund manager makes the necessary asset allocations.
Does MIP Provide Monthly Income?:
MIP does not guarantee regular monthly income, however one can expect steady income. MIP income is mainly in the form of periodic dividends. This dividend in the hands of investor is tax free. Someone who is looking for regular monthly income can achieve it via Systematic Withdrawal Plan (SWP).
Are MIP Returns Guaranteed?:
MIP returns are not guaranteed.  Performance depends on bond prices and the performance of the equity market. There are very remote chances that MIP may give negative returns. One can expect around 10% to 12% from MIP Funds
Is there Any Exit Load?:
Exit Load is applicable, if exited within one year of investment. There is no exit load if you stay invested for a year or more.
Any Smart MIP Tips?:
Most of the investors have the tendency to go with dividend option. In fact some of the advisors recommend you to go with dividend option quoting “Dividends are tax free in the hands of investor". There is nothing wrong in this statement, however one should understand that the fund company would have already paid Dividend Distribution Tax prior making the pay-out. This reduces the effective yield.
Smart Approach would be to choose Growth Option. From 13th month onwards you withdraw money via Systematic Withdrawal Plan (SWP). The idea to start the SWP from 13th month is to qualify for long term capital gains. Irrespective of your tax bracket you will be paying tax at 10.3% - without indexation or 20% (with indexation benefit). Taxes to be paid will be lower the two.
Ideal tenure for MIP:3 to 5 years is ideal time frame
Here is list of few MIP and their returns in %.
Fund Name
3 Years
5 Years
HDFC MIP LTP
12.6
10.3
Can Robeco MIP
10.1
10.5
Reliance MIP
11.1
11.6
HDFC Multiple Yield Fund-G
13
10.2
ICICI Pru-MIP
10.3
7.4

Source: Money Control.  Returns are annualized.
Any Alternative to MIP:Bank Fixed Deposits, Fixed Maturity Plans, Liquid Funds.
Have you invested in MIP?

2 comments:

justgrowmymoney said...

Cool treatment of MIP.

If liuidity is not a worry MIP is a very good replacement for Debt investments!

WealthUCreate said...

Bang On.... Annualized returns of 11% for 5 years is quite good. especially considering the tax advantage when compared with FD's

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