Monthly Income Plan

Have you ever dreamt of a dependable source of income that could augment your retirement or even create a buffer at times of stress? Many people try to search for investment options that promise growth and stability. The security of money is of utmost importance in today's fast world. This is where Monthly Income Plans, popularly known as MIPs, come into play. They generate a steady monthly income, allowing you to beat inflation after retirement.

This article will discuss the monthly income plans and explore how SWPs can greatly add to your portfolio.

What is A Monthly Income Plan?

A monthly income plan (MIP) is a mutual fund investment designed to preserve capital by generating cash flow. This is achieved with debt and equity securities in a proper mix. It should give investors, especially retirees, a regular income stream through dividends or interest payments.

Generally, with their aims of preservation of capital and income generation, MIPs invest conservatively. The fund's equity component is pretty low, while the majority lies in debt securities. This strategy targets steady returns while allowing some scope for profit through limited equity exposure. Usually, the ratio is about 20% in equity and 80% in debt.

How Does Monthly Income Plan Work?

Before investing in an MIP, the investor has to gauge his needs regarding income and risk appetite. The fund is under no obligation to return the money on a month-to-month basis in the form of dividend payments, and during months when the profits are low, the payments may stop altogether.

A MIP can provide regular income in retirement to the right investor. The problem many retirees face is drawing down savings in non-targeted withdrawals to meet monthly expenses. A monthly income plan can generate a consistent monthly income and assist in budgeting more accurately. Accurate budgeting reduces the risk of overspending, as with an annuity.

The type of equity that can form the MIP portfolio may also vary, with certain funds taking exposure to a select market segment, such as small, medium, or large-sized companies. Some funds may take a mixed approach.

For Indian taxation law, MIPs are treated as debt funds. This classification applies to any fund investing below 65% of its total assets in stocks. These funds also pay dividends, which are considered income and are taxed at slab rates as per the age and income level of the investor.

The tax treatment of capital gains is somewhat different in that short-term capital gains, triggered upon holding an asset for up to 36 months, attract taxes at the rate of 15%. Long-term capital gains are usually attracted at a rate of 20% for assets held beyond 36 months with indexation benefits.

Types of MIP

Monthly income plans, commonly known as MIPs, are usually divided into two classes:

• Dividend-oriented MIP -  This mutual fund's prime objective is to produce a regular and continuous income in the form of dividends for its investors. Dividend-oriented MIPs typically invest in a blend of debt.

and equity instruments, wherein a significant proportion is dedicated to debt securities to ensure regular income generation.

• Growth-based MIPs -  In growth-based MIPs, there are no dividend distributions. Dividends derived from investments are reinvested back into the funds.

Benefits of Investing in A Monthly Income Plan

A monthly income plan or MIP has several advantages that improve financial stability and security. The key benefits are outlined below:

• Guaranteed Regular Income - One of the primary reasons people like MIPs is the guaranteed, predictable income. These plans will give you a set amount on a continuing monthly basis, irrespective of the minor up-and-down changes in your investments on a day-to-day basis. Thus, they are highly suitable for retirees who need dependable income to meet their month-to-month expenses.
  
• Power of Compounding - In a growth-oriented MIP, the returns are reinvested in the fund instead of being paid out. This reinvestment helps you gain significant wealth through the magic of compounding, whereby returns are earned on the initial investment and the profits reinvested.
  
• Lump-Sum Benefit - Top monthly income plans provided by life insurance companies offer a lump-sum benefit. It is a one-time payment paid out after maturity or an event, usually at the end of the policy term, giving you substantial financial support when you need it the most.
  
• Higher Returns - MIPs usually offer better returns than other fixed-income securities available in the market. Historical performance data indicates that MIPs yield more attractive returns, making them a more lucrative option than fixed securities, which generally have low yields.
  
• Tax Benefits - MIPs have tax benefits that can help decrease your annual tax liability. Besides, the investment in these plans provides a regular monthly income and allows you to save on taxes, thus being financially prudent.

How to Earn Regular Income From Mutual Funds?

The Systematic Withdrawal Plan (SWP) guarantees periodic income from mutual funds. Unlike a Systematic Investment Plan (SIP), where you invest in mutual funds in instalments, the SWP is the opposite. While SIP transfers money from your bank account to your selected mutual fund scheme, an SWP does the reverse by transferring money from your mutual fund investments into your bank account.

In other words, you can draw a fixed amount of money from a mutual fund scheme at regular intervals through an SWP. This frequency can be monthly, quarterly, or half-yearly, depending on your needs. The quantum of withdrawal can also be altered at intervals due to changed needs. SWP allows you to withdraw only the gains so your capital remains unaffected.

When the amount and frequency of withdrawal are decided, units from your mutual fund scheme are sold on the date selected, and the funds are transferred to your bank account.

The SWP plan redeems units from your mutual fund scheme at the selected intervals to provide the cash flow. This process continues till there are units in the scheme.

Let's understand this with the help of an example.

Suppose you invest a single amount of Rs 8 lakh in a mutual fund scheme. The purchase NAV is Rs 16, so you purchased 50,000 units. Now, you want to start a monthly SWP of Rs 12,000 one year after the investment date.

Let the NAV of the scheme in the first month of SWP be Rs 20. For Rs 12,000, the AMC will sell 600 units- Rs 12,000 / Rs 20 NAV. So, your units will become 49,400 (50,000 - 600). The value of your investment becomes Rs 9.88 lakh (49,400 X 20) from Rs 8 lakh.

As the table above illustrates, the number of units held falls over time under the SWP arrangement. If, however, the scheme's net asset value appreciates at a rate in excess of the amount withdrawn, the investment can grow in value.

In the second month, if instead of a rise, the NAV falls, then its impact on your investment value would be precisely the opposite. Your investment value falls to Rs 8.77 lakh; due to the fall in NAV, more units need to be redeemed.

However, even in the case of a fall in the NAV of the mutual fund scheme, the SWP will return regular income until the selected duration of the SWP ends or the units are exhausted in the investment. Generally, the SWP option is wiser for those who rely on mutual funds for regular income. You can take out your chosen amount at regular intervals without any restriction.

Best Mutual Funds to Earn Monthly Income

Here is a list of some of the SWP plans you can invest in:

Conclusion

MIPs remain one of the best avenues for investment if you want a judicious blending of growth with income. You could get steady returns with the protection of your capital by investing in MIPs. Remember, the performance may vary. Past performance records do not guarantee future performances, and all investments carry a certain degree of risk. A prudent investor must research the instrument or consult a financial adviser before investing in MIPs. This will place you in a position to adequately judge whether MIPs fit into your investment strategy, considering your financial goals and risk tolerance.
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