Raghav Chakroborthy, new General Manager of a private IT firm, started shooting his doubts to his best friend Madhav, when he wanted to save a part of his income for his two little angels.
Monthly Income Plan (MIPs)
See…. In a mutual fund scheme, basically the amount is paid in accordance with the fund objective set by the mutual fund house. As you know, the amount that they distribute is in the form of dividends depends on the profit they make.
These MIPs are generally ‘Debt oriented schemes’. They invest the money in a mixed format- in both equity and debt. They normally keep a ratio of 20:80 or 30:70 or so. Their aim is to give the maximum regular benefits to the investor by reducing the risks.
Being said so, the major part of the fund will be invested in (70 to 100%) Debt instruments like ‘commercial paper, certificate of deposits, government securities, treasury bills etc., so that they can yield interest on them. The remaining will be invested in Equity.
This because the former will give stable, safe and consistent income, while the equity will keep on fluctuating in accordance with the portfolio management.
Now see, even MIP can be done in two ways: MIP Aggressive & MIP Conservative Plans. It depends on the percentage of equity exposure that MIPs take.
The one’s in which the investment in equity max 20% - 30% can be treated as “MIP Aggressive Plans” and the in which investment in equity is between 0-20% are treated as MIP Conservative. MIP Agressive may offer you better returns on your investment. But yes!! Faster the returns, higher is the risks.”
“So is there any point of risk?” Raghav was taken aback.
“Yes… But if you keep a close eye on a few things it would be easy” Madhav consoled
“What are they?”
“Mmmm… for example:
Normally an MIP is affected by the interest rates. There is an inverse relationship between interest rate and MIP. When interest rates goes downwards MIP provide better returns and vice-e-versa
- You have a variety of payout options- monthly, quarterly, half-yearly.
- But they may charge an ‘Exit Load’, of around 1%, if you take it in less than one year of holding.
- I believe that the ideal time for returns in MIPs can be around 3 to 4 years.”
“So it's not necessary that we get a regular income??” Raghav sounded curious.
“Well it not like that… You have two options in MIP say:
Dividend Option : Dividends in MIPs are tax free in hands of investors but Mutual Fund companies have to pay a 28.33% Dividend Distribution Tax (DDT) including surcharge and cess and 30% plus surcharge and cess for others (33.99%) before distributing it to you as investors
Growth Option: If you opt for Growth option, it is subject to Capital Gains Tax. Short Term Capital Gains (if units are held for 36 months or less) are taxed as per the Income Tax Slab Rate of investors. For Long Term Capital Gains (if units are held for more than 36 months) are taxed at 10% without indexation or 20% with indexation. The indexation benefit inflates the cost of purchase lowering long term gains tax liability, which is not the case of FD.
The tenure of the holding period matters, when one has to decide between growth and dividend options. You can go for the growth option if the holding period is more than a 3 years and for the dividend option if the holding period is less than 1 year
The reason is that gains from investment in Mutual Funds, if redeemed after 3 year in debt schemes, are considered
long-term capital gains. In the case of long-term capital gain, the investor is given the option of choosing between
Dividend Option : Dividends in MIPs are tax free in hands of investors but Mutual Fund companies have to pay a 28.33% Dividend Distribution Tax (DDT) including surcharge and cess and 30% plus surcharge and cess for others (33.99%) before distributing it to you as investors
Growth Option: If you opt for Growth option, it is subject to Capital Gains Tax. Short Term Capital Gains (if units are held for 36 months or less) are taxed as per the Income Tax Slab Rate of investors. For Long Term Capital Gains (if units are held for more than 36 months) are taxed at 10% without indexation or 20% with indexation. The indexation benefit inflates the cost of purchase lowering long term gains tax liability, which is not the case of FD.
The tenure of the holding period matters, when one has to decide between growth and dividend options. You can go for the growth option if the holding period is more than a 3 years and for the dividend option if the holding period is less than 1 year
The reason is that gains from investment in Mutual Funds, if redeemed after 3 year in debt schemes, are considered
long-term capital gains. In the case of long-term capital gain, the investor is given the option of choosing between
- 20% tax rate with indexation benefit, and
- 10% tax rate without the benefit of indexation
Check an example of Indexation benefit here
Advantage of MIPs
Some of the features of balanced funds are:
1. Provides diversification in its truest sense by investing in bonds and equities
2. Invests a sizable proportion in equities, hence the returns you receive are decent
3. Provides automatic portfolio re-balancing; an added cushion during volatile markets. Therefore, when markets are positive, the fund manager sells equity to maintain its maximum level and vice versa
1. Provides diversification in its truest sense by investing in bonds and equities
2. Invests a sizable proportion in equities, hence the returns you receive are decent
3. Provides automatic portfolio re-balancing; an added cushion during volatile markets. Therefore, when markets are positive, the fund manager sells equity to maintain its maximum level and vice versa
The drawback is that MIPs do not guarantee returns. But this is not a big worry as the better performing MIPs have regularly paid dividends. Therefore, for those who want regular incomes, like senior citizens or people with lower incomes, conventional products are better as returns are guaranteed.
PPS: If you think this page and blog will be useful to any of your friends please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left
Mutual Funds & Insurance Related Articles :-
Benefits of Systematic Investment Plan
What is Systematic Transfer Plan and How it works ?
Advantages of Equity Linked Savings Schemes
Top 3 Mutual Funds to Invest in 2016 for Long Term
Fixed Maturity Plan : Your Friendly Alternate to Traditional Investment
How to Select Mutual Fund for Portfolio ?
How to Budget your money with 40/30/30 Rule ?
How Much Insurance Do I Need ?
Mutual Fund Versus ULIP
Why Term Insurance Policy is required till 60 years ?
Equities related article :
Risk Management in Broking House for You as Investor
Understand Your Daily Margin Statement
What is Power of Attorney in Online Trading?
Futures & Options related article :
Futures Trading TerminologiesWhat is Futures Trading?
What is Derivatives ?
What are Forward Contracts ?
Advantages & Disadvantages of Futures Trading ?
Guide to Options Trading
Long Call - Bullish Trading Strategies
Long Put
Short Call - Bearish Strategies
Sell Put - Bullish Strategies
Buy Straddle Option
Short Straddle Option
Synthetic Long Call
Synthetic Long Put
Synthetic Long Futures
Synthetic Long Futures
Bull Put Spread
In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me @vipuls1979
Disclaimer :-
The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.
Glenmark Pharma receives approval from Russian Ministry of Healthcare to market Montlezir.
ReplyDeleteFree Intraday Tips
Thank for your valuable information. stock investor is a stock related website which provides day to day information of the stock market.
ReplyDeleteUnited Breweries Ltd
Karur Vysya Bank Ltd