Investment Plans

Quick Guide: Monthly Income Plan

Nov 29, 2021

A monthly income plan is basically an open-ended mutual fund plan, that chiefly invests its assets towards fixed-income instruments. It is a unique combination of both equity as well as debt assets where over 65% of the assets get invested towards low-risk securities. It acts as a reliable alternative source of regular income flow every month. 

The income from the monthly income plan mainly comes in the form of dividends and interests. However, the MIPs do not form quite a reliable source of steady revenue-earning on a fixed basis. The returns from this source get governed by the profit generated as with the case of other market dependent investment tools.

What are Monthly Income Plans?

This is chiefly a debt-oriented income scheme where 70%-80% of the fund gets invested towards the debt funds, whereas the remaining gets invested towards the stock options. This is done with the idea of earning a fixed return, capitalizing on the investment to the optimum through equity exposure.

Features and Benefits of Monthly Income Plans

  1. No limit: This is a flexible scheme and does not come with an upper limit of investment. It allows investors to invest as per their individual capacities and requirements.
  2. Open-ended: The Monthly Income Plan is an open-ended investment instrument where the investors are not required to pay any sort of processing fees as an entry load while entering the domain of the said scheme. However, there is an exit load of less than 1% of the total invested amount.
  3. Liquidity: The MIP scheme is noted for its liquidity compared to most of the other investment schemes. As there is no scope of any lock-in period, therefore the investors can withdraw the fund as and when required in case of any emergencies.
  4. Better returns: The earnings and returns generated through Monthly Income Plans are better than Post Office Monthly Income Schemes and traditional FDs.
  5. Guaranteed Income: The investors enjoy guaranteed returns on their investments each month, irrespective of the fact that the quantum of the fund varies depending on the overall financial market performance.
  6. Low risk: MIPs are involved with low risk because the fund majorly gets invested in low-risk securities like dividend stocks, preferred shares and fixed-income instruments.
  7. Professional management: The MIPs are professionally managed by expert fund managers with exhaustive knowledge and understanding of the market trend. They are only mere monitors of the funds, but also decide the perfect time for switching funds between debts and securities for maximum returns and benefits.

Types of Monthly Income Plans

  • Dividend-oriented Monthly Income Plan: The returns and earnings generated through this sort of scheme come in the form of dividends. There is no tax levy on the dividend paid to the individual investor. These dividends are paid by the AMC from their distributable surplus. It is paid when the concerned fund earns profit from the market.
  • Growth-oriented Monthly Income Plan: The accrued returns on the capital gets added to the invested amount under this scheme. Thus, it facilitates wealth creation, improving the overall corpus growth in the long run.

Tax implications

It is essential to know tax implications on your investment instruments, for tax planning is another important brick of wealth creation and financial planning. As this is a debt-oriented mutual fund, MIP is liable for taxation. Both LTCG and STCG acquired through MIP are eligible for taxation.

In the case of STCG, the individuals can decide to dispose of the units that they have been holding for 3 years. The accrued gains get added to their income. The taxation is decided on the entire fund depending on the respective tax slab.

If an investor decides to liquidate their fund after 3 years have elapsed since investment, then LTCG will be calculated at the rate of 20%.

There is even another levy for dividend distribution tax calculated at the rate of 25%, before the distribution of the accrued dividends; although the dividends received by the investors do not possess any tax implication.

A Quick Glance

TypeDebt-oriented hybrid mutual fund
Investment limitNone
LiquidityHigher than most of the schemes
ReturnsHigher than POMIS and FDs
RiskModerately low
ManagementDone by the expert professional fund managers
Component70%-80% in debt funds, the remainder in stocks
SuitabilityRisk-averse investors and retired personnel
Tax benefitsApplied on the dividends at hand

Who are the ideal investors?

The unique balance of risk and reward makes MIP an ideal investment instrument for the retirees who have a limited source of steady monthly income. Moreover, this sort of MIPs also proves to be of great help in case of financial emergencies. Moreover, any risk-aversive investors with low-risk appetite are ideal suitors for this scheme.

Any investor who belongs to the higher tax-bracket can also consider choosing MIP for increased tax-efficiency. For the investors belonging to the lower tax bracket, MIP can be the choice for improving the scope of earnings through the growth-orientation of the MIPs. It ensures higher returns and reduction of the associated tax burden.

Considerable factors before choosing MIP

  • Deciding the financial goal—long-term or short-term
  • Comfortable investment time horizon
  • The associated pay-out options of the scheme chosen
  • The premium amount of the chosen scheme and its viability
  • Scope of wealth enhancement/generation
  • Risk appetite and contemporary financial standing during the redemption
  • Associated tax benefits
  • Suitability
  • Overall market conditions and its performance

Some of the best Monthly Income Plans

Aditya Birla Sun Life Insurance Monthly Income Plan18 years-55 years10/12 years
Aviva Income Suraksha18 years-48 years10/12 years
Bajaj Allianz Life Income Assure0 years-50 years5,7,10 and 12 years

This is a comprehensive guide regarding the details of the Monthly Income Plan. Depending on the suitability and financial standing, the investors are free to choose and opt for this financial instrument.

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