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 Short term capital gain tax at respective income tax slab would be applicable if redeemed (withdrawn) within 3 year and long term capital gain tax of 10% without indexation (or 20% with indexation) is applicable  if redeemed (withdrawn) after 3 year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.

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