Mutual Fund’s Monthly Income Plan : An overview

Mutual funds are traditionally classified by the investment asset class they own. Mutual funds which own only stocks (Equity) are called Equity mutual fund. Mutual funds which own only bonds are called bond fund. Mutual funds which own both bonds and stocks are called hybrid fund.

Mutual fund’s Monthly Income plan (“MIP”) is a hybrid Mutual fund which invests in both equity and bond. Typical MIP invests 80-85% in Bond and 15-20% in Equity.

Benefits of investing in Monthly Income Plan Mutual Fund:

• MIP provides stability (from significant bond component) and strives for capital appreciation (from smaller equity component)
• MIP offers automatic rebalancing- Assume equity is growing faster than the bond then weight of equity crosses 15%-20%(prescribed limit); then fund manager would book profit from equity and invest the same in bond
• MIP generates better return than the bank FD or bond fund due to presence of smaller equity component
• MIP fund investment strategy aims at income generation (in terms of Coupon from bond investment and dividend from Equity component)

Potential return and tax effect:

• MIP over last 5 years have generated a CAGR return of 10-12%; the realistic long term expectation going forward could be close to 9-10%.
• MIP are treated as bond fund from tax perspective. Short term capital gain tax at respective income tax slab would be applicable if redeemed (withdrawn) within 3 year and long term capital gain tax of 10% without indexation (or 20% with indexation) is applicable  if redeemed (withdrawn) after 3 year

Potential risk

• MIP invests 80-85% in bonds which is subjected to interest rate volatility and remaining 15-20% in equity which would be deployed mainly into Large Caps; MIP is suitable for conservative (risk averse) investor.

Conclusion: 

MIP is a debt oriented hybrid fund with small exposure to equity and can generate a realistic return of 9-10% (under current circumstances). MIP is a very good alternative for Bank FD as it provides higher after tax return, provides better liquidity and flexibility. A significant corpus in MIP at the time of retirement can provide better monthly after tax retirement cash flow compared to an equivalent corpus in Bank FD.

For any investment related queries/advise feel free to get in touch with me on 0965-65708812/91-9500151529

Balanced Mutual Fund: An overview

Mutual funds are traditionally classified by the investment asset class they own. Mutual funds which own only stocks (Equity) are called Equity mutual fund. Mutual funds which own only bonds are called bond fund. Mutual funds which own both bonds and stocks are called hybrid fund.

Balanced Mutual fund is a hybrid Mutual fund which invests in both equity and bond. Typical Balanced fund invests 65% in stocks and 35% in bond.

Benefits of investing in Balanced Fund:

•     Balanced fund provides twin benefit of growth (from equity component) and stability (from debt component)
•   Balanced fund offers automatic re balancing- Assume equity is growing faster than the bond then weight of equity crosses 65%(prescribed limit); then fund manager would book profit from equity and invest the same in bond
•  Balanced fund offers lower volatility compared to an equity funds
•  Balance fund offers better liquidity and more tax efficient than the bond funds

Potential return and tax effect:

•  Balanced fund over last 5 years have generated a CAGR return of 15-16%; the realistic long term expectation going forward could be close to 12%.
•  Balanced fund are treated as equity fund from tax perspective. Short term capital gain tax of 15% is applicable if redeemed (withdrawn) within 1 year and long term capital gain tax of 0% is applicable  if redeemed (withdrawn) after 1 year

Potential risk

• Balanced fund invests 65% in equities which is subjected to market volatility and hence the fund return would be more volatile compared to a bond fund/bank FD

Conclusion: Balanced fund offers automatic re balancing which allows your investment portfolio to be more balanced in different market conditions.  Balance fund offers good return, provides diversification benefit, offers flexibility and are tax efficient (long term capital gain is zero percent).Balanced fund comes handy in portfolio building and is a good option for first time equity investors.

For any investment related queries/advise feel free to get in touch with me; you can reach me on 0965-65708812/91-9500151529