A monthly income plan (MIP) is a type of mutual fund that invests primarily in debt and equity securities with a mandate of producing cash flows and preserving capital. The aim of an MIP is to provide a steady stream of income in dividends and interest payments.This makes it attractive to retirees who may not have other substantial sources of monthly income.
Key Takeaways
- A monthly income plan (MIP) is a mutual fund strategy that seeks to generate stable income through dividend and interest cash flows.
- A MIP often invests in lower-risk securities, including fixed-income instruments, preferred shares, and dividend stocks.
- Popular especially in India, MIPs are most suited for retirees who seek stable income rather than capital gains.
- Investors should keep their risk tolerance in mind before investing in a MIP.
- Dividends paid to investors through MIPs are taxed based on the country where they are issued.
Understanding Monthly Income Plans (MIPs)
A monthly income plan is a type of mutual fund. The objective is to preserve capital and generate cash flow by investing in a mix ofdebt and equity securities. As such, they provide an alternative, steady income stream to investors who need it, including retirees. This comes in dividends or interest payments.
Since they are designed to preserve capital and provide investors with a source of income, the investment mix of an MIP is generally conservative. This usually means that the equity portion of the fund tends to be fairly low. The bulk of the investments are in debt securities. That's because they target steady returns with a portion dedicated to maximizing profits through equity exposure. The ratio tends to be 20% in equity to 80% in debt or something similar.
Despite the name, MIPs do not guarantee a monthly income. Investors can expect a steady stream of income when the market is strong but could see a downturn in bear markets.The level of equity exposure is affected by market volatility. Since stock holdings are more prone to fluctuationsin price, they are usually a limited portion of the entire fund. Interest rate fluctuations may also affect the net asset values (NAVs) of these funds.
Although they are offered to investors in the U.S., MIPs are more common in other countries like India.
How Monthly Income Plans Invest
Investors should review their income needs and risk tolerancewhen deciding whether to invest in one of these plans.There is no obligation for the fund to make monthly dividend payments. When profits are weak, it may skip making payments altogether.
A MIP can offera steady stream of income for retirement living for the right investor. Problems arise when people reachretirement and spendtheirnest egg,making random withdrawals of varying amounts to support their monthly expenses.
A monthly income plan can deliver a stable sum of income each month,which allows for more accurate monthly budgeting. Careful monthly budgeting can help avoid the risk of overspending. The same objective is present in anannuity.
The types of equities investedin vary as well. Some funds limit equity exposure by focusing primarily on small, medium, or large-sized companies. Others use a mixed approach.
The Securities and Exchange Board of India (SEBI) prohibits funds from promising returns unless they can be guaranteed by the asset management company. Those that do must disclose this in their offer documents.
Taxation of Monthly Income Plans
United States
MIP funds are taxed using standard interest anddividend calculations in the United States. As with other funds, earnings sold beforeone year are short-term capital gains. These gains are counted as income and subject to the investor's income tax rate. Sales occurringafter one year are considered long-term capital gains, taxed at either 15% or 20% (depending on taxable income).
India
A monthly income planis treated as a debt fund for taxation purposes in India. Indian tax lawapplies this moniker to any fund that invests less than 65% of its assets in stocks. Any dividends paid out to investors are taxed as income at peak rates. These rates are based on an investor's age and income level.
The tax treatment of capital gains is slightly different in India, though. Short-term capital gains are triggered on assets held for up to 36 months at a rate of 15%. Long-term capital gains (for assets held over 36 months) generally stand at 20%.
What Is the Goal of a Monthly Income Plan?
Monthly income plans are generally mutual fund investment plans that allow investors to preserve their capital while producing cash flows. These plans typically have a higher ratio invested in debt securities and a smaller mix of equity-based investments. MIPs are designed for older investors and retirees who want a steady stream of income.
How Are Monthly Income Plans Taxed?
The taxation of monthly income plans depends on where they're offered. Standard calculations for interest and dividends apply in the U.S. Short-term capital gains are triggered on the sale of assets held less than 12 months and are taxed at the investor's regular income tax rate. Long-term rates apply to investments held for more than 12 months at 15% or 20% based on the investor's income threshold.
What Options Are Available to Investors for Monthly Income?
There are a number of options open to investors of monthly income plans. They include the more popular mutual fund plan or the monthly income plan, as well as annuities, government bonds, and fixed deposits. You may also want to consider investing in dividend-paying stocks, real estate (like rental properties), and real estate investment trusts. Make sure you speak to a financial or investment professional for more information and options that best suit your personal situation.
The Bottom Line
Monthly income plans are a great way for investors to ensure they get a steady income stream. Well-suited for retirees and older investors, these plans pay investors dividends and interest income by primarily investing in lower-risk assets like debt securities. A smaller position in equities offsets this. MIPs are popular in India but can be found in other countries like the U.S. As with any other financial venture, it's important to consider whether they fit your needs along with any tax implications that may apply. If you're unsure whether MIPs are right for you, talk to an investment or financial professional.
