Looking for regular income? Avoid MIPs
Agents take the liberty of calling Monthly Income Plans stable schemes, but their mix of debt and equity, particularly now, make them a poor option if you’re looking for assured income.
Monthly Income Plans (MIPs), like a few other mutual fund schemes, are deceptively-titled. What it would sound like to a lay investor is that it assures a monthly return on investment. In fact, MIPs don’t guarantee any monthly returns. But it isn’t as if there’s a great element of stability in them either. These schemes combine equity and debt, both of which can fluctuate to send returns spiraling downward. On the other hand, they can also outperform FDs by a great margin. So what should you do? When do you invest your money in them? For what reasons should you stay away?
What risk? MIPs are supposed to be geared to delivering periodical returns through a relatively safe investment strategy. However, they are also a type of hybrid scheme, which means that there’s equity exposure, too. How risky can they be? Well, MIPs can invest up to 30% of your investment in equity, with the rest going into debt schemes. And debt schemes do poorly when interest rates rise, as they are now and expected to as well.
Irregular income If you pick the dividend option, which is what you would need to do if you want regular income, you would think you would get regular income. However, there is no guarantee that it would be paid out monthly. Dividends could be even three months apart.
Considering returns The good MIPs can do very well, far better than any FD would pay out. However, some MIPs also do badly, far worse than any FD. Moreover, in difficult times, when the stock market is volatile and interest rates on the rise, these investments perform very poorly, as they have over the past 12 months. Average returns for MIPs have been far lower than those for FDs (even if you’re in the highest tax bracket) over the past year. Even the good ones have yielded only around 1% more than the 6.5% most FDs give those in the highest tax bracket, while the poor performers have been closer to 0.5%.
What you should do If you’re looking for regular income, stay away. On the dividend options of debt schemes, there is now a 28.325% tax. It doesn’t matter which tax slab you’re in. So, if you’re in the bottom two tax brackets, the FD is offering better tax treatment. The only question – the most important one – is the returns. Can the MIP earn more than an FD, while the latter is earning almost 10% p.a.? With interest rates this high, it will be tough for MIPs to do so. Perhaps when rates soften, they will, but not now. A big downside for MIPs on account of low returns is that there’s even less chance of any dividend being paid out. Consequently, the FD, at least at this stage, is looking like a better option for those who want to live off the returns.