If you're looking at saving for a rainy day, and hope to have a steady stream of income when you retire, then the Monthly Income Plan might be just the ticket.

What is a Monthly Income Plan?

Monthly Income Plans, or MIPs, are a category of mutual funds that invest mainly in debt instruments (i.e. bonds, certificates, etc).

MIPs provide a monthly income to investors, but the periodicity depends upon the option you choose. These are generally monthly, quarterly, half-yearly and annual options.

A growth option is also available, where you do not receive regular dividends, but gains in the form of capital appreciation.

About 10-20% of your assets are allocated to equity stocks.

However, like any other fund, the returns are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation.

With the current levels of market volatility, MIPs can be a good option considering their exposure to debt instruments. These will help you maintain a low-risk portfolio and generate regular and stable returns. Stability, rather than quick and high returns, should be the priority for a typical MIP investor.

MIPs differ from Income Funds, which are launched with the objective of posting regular returns (either in the form of dividends or capital appreciation).

Is the Monthly Income Plan for you?

If you are conservative in your investments, but want to earn marginally better returns than a debt-only portfolio, then the MIP is for you. An MIP typically invests the bulk of its assets in debt, while a small equity exposure is maintained to earn something extra.

While MIPs are typically availed of by retired persons, the 'Growth' option of an MIP fits in neatly into the risk-return profile between a pure income fund and a balanced fund.

This is attractive to investors like HNIs (High Net-worth Individuals), institutions, trusts, etc. as these investors typically do not require a regular monthly dividend inflow.

However, capital appreciation with a controlled level of risk is an extremely important parameter for investment. The controlled equity exposure of a maximum of 15% should deliver the icing on the cake over the medium term and should generate higher returns compared to a pure debt fund, albeit with a slightly higher level of risk.

MIPs score over comparable investment avenues in tax efficiency. MIPs are more tax efficient than bank fixed deposits as mutual fund dividends are tax-free in the hands of the investor.

Income from bank FDs are exempt up to Rs 9,000 (under Section 80Lof the Income Tax Act), beyond which they are taxed depending on the tax bracket of the individual.

However, Monthly Income Plans are more risky (and not less so) than pure debt funds, because of their equity component. While they offer the opportunity to earn higher returns than possible from pure debt funds, their returns may be lower, if the equity component performs poorly.

Second, because of the higher volatility caused by the equity component in MIPs, they are not ideal vehicles for risk-averse investors seeking to supplement their monthly pension.

The Post Office Monthly Income Scheme

The Post Office Monthly Income Scheme allows for the investment of a lump sum, that then earns interest on a monthly basis.

This type of MIP is best suited to retired persons. The post-office MIS gives a return of 9.5 per cent plus a bonus of 10 per cent on maturity. However, this 10 per cent bonus is not available in case of premature withdrawals.

Like all post office schemes, the MIS has the backing of the Government of India, and is, therefore, a safe investment.

The minimum investment in a Post-Office MIS is Rs 6,000 for both single and joint accounts. The maximum investment for a single account is Rs 300,000 and Rs 600,000 for a joint account. With a duration of 6 years, money may be withdrawn before three years, at a discount of 5 per cent.

Additionally, the interest income accruing from a post-office MIS is exempt from tax under Section 80L of the Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt from Wealth Tax.

What should you do?

Determine if the MIP is an apt investment avenue. If you seek an assured monthly return, then you might want to consider other options. Select the right MIP based on a variety of factors ranging from the fund house, the MIP's investment style to its track record, among others.

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