Have you ever wished for an additional source of income that you could rely on if something unexpected were to happen to your primary revenue stream? What if you lose your job unexpectedly or you meet an emergency cash requirement? Having a backup source of income is always a smart move, and hence, most people invest in insurance plans.

However, the problem with traditional term plans is that they provide your family with a lump-sum amount after you're gone and not while you're alive. This is where monthly income plans come into the picture.

A monthly income plan is a select type of mutual fund scheme that provides investors with a steady stream of additional revenue over a long period. The opportunity to generate extra income makes monthly income plans suitable for retirees and other investors who do not have substantial sources of income.

Here, in this guide, we take a detailed look at monthly income plans, analysing the features and benefits, helping you decide whether it is the right investment option for you. 

What are monthly income plans? 

As mentioned above, monthly income plans are a type of mutual fund scheme. It is a hybrid mutual fund scheme that allocates assets predominantly for debt instruments (nearly 80%) and the rest in equities (around 20% or lower). 

The objective of monthly income plans is to provide investors with periodic payouts, in the form of dividends and interest earned. However, since it's a mutual fund scheme, the returns are subject to market conditions and are always not guaranteed.

Though the plan is termed as a monthly income plan, it may or may not generate revenues every month. The performance of the scheme is tied to market fluctuations.

Salient Features of Monthly Income Plans

Monthly income plans have several features that make it an attractive alternative to conventional investments like post-office saving schemes and bank fixed deposits. Some of the highlights of monthly income plans include:

  • Higher returns – The returns generated by monthly income plans average around 11 to 14%. Contrast this with the profits generated by FDs that range around 8 to 9%.  

  • No limits on investment – When compared with traditional investments, there are no upper limits on the investments you can make. 

  • Lower charges – Monthly income plans do not have an entry charge. Also, the exit charges are just 1.0%. 

  • Easy liquidity – Since monthly income plans do not have a lock-in period, investors can quickly redeem units whenever required.  

  • Hassle-free – Monthly income plans do not require investors to continuously track fund performances, as there are no switches to be made. 

  • The entire earnings are not distributed as dividends – One unique feature of monthly income plans is that the entire profits are not distributed as dividends. Only a portion of the earnings is distributed as income. The rest is reserved for future dividends when there are no substantial earnings.  

  • Invest in monthly income plans when the interest is high – In a monthly income plan, fall in the interest rate causes an increase in the NAV value, and a rise in the interest rate causes the NAV to take a dip. So, look to invest in MIPs when the interest rates are high.  

Classification of Monthly Income Plans 

Monthly income plans can be classified into the following two categories:

  1. Dividend-based MIP – As the name implies, the periodic payouts are paid in the form of dividends. The dividends generated from a MIP are tax-free, in the hands of the investor. However, the fund house has to pay the 14% DDT (Dividend Distribution Tax), which reduces the percentage of dividends available to the investor. 

  2. Growth-based MIP – Here, the earnings generated by the fund are not distributed to the investor. Instead, it's added to the capital. Despite the name, monthly income plan, the profits are not paid out to the investor. Instead, it's added to the capital at regular intervals. The investor receives the capital as well as profits earned when redeeming units of the fund.  

Dividend-based MIP vs Growth-based MIP

Dividend-based MIP Growth-based MIP
The investor receives periodic payouts that are distributed when the fund shows a surplus. No regular payouts. The dividends generated are re-invested in the capital.
Dividends are paid only when the fund shows a profit. The profits are not paid to the investor. Instead, it's re-invested leading to the growth of the corpus.
It provides an additional source of income. However, it’s not mandatory for a MIP to declared dividends regularly. It helps in wealth creation.

 

Risks associated with Monthly Income Plans

As monthly income plans are debt-oriented (they invest mostly in public securities, corporate bonds and debentures), they are not as risky as pure equity-oriented mutual funds. 

However, the overall risks of MIPs depend on the percentage of equity allocation of the fund. The risk factor of monthly income plans depends on the type of equity assets – small-cap, mid-cap, large-cap, micro-cap, theme-based funds, etc.

Average Returns generated by Monthly Income Plans 

Generally, monthly income plans provide higher returns when compared to pure-debt funds, thanks to their equity component. The average returns from MIPs are around 10 – 12%, which is significantly higher than the gains earned by fixed deposits.

However, note that while returns are high, the dividends generated by the plan are not guaranteed, and it is at the discretion of the AMC (Asset Management Company).

Monthly Income Plans are Best Suited for:

  • Moderate risk-taking investors who want the best of both worlds – the capital growth of equities as well as the capital protection of debt-funds.

  • Retirees who want to supplement their post-retirement income with an additional source of revenue. 

  • New mutual fund investors who are just getting started with equity-oriented investments. 

Taxation of Monthly Income Plans

Just like all other debt funds, the income generated from a MIP is taxable. The short-term and long-term rules of capital gains for debt funds are applicable to MIPs. 

If the investor redeems units before the completion of three years, then the gains generated attract short-term capital gains tax. It’s taxed as per the tax bracket of the investor. If units are redeemed after three years, it attracts long-term capital gains tax. Long-term capital gains are taxed at 20%. 

However, note that the dividends received are not taxable for the investor. The fund house pays the dividend distribution tax at 25%. 

If you fall in the higher tax bracket, you can opt for dividend-based MIPs, as there are no taxes on the dividends received. Individuals who fall in the lower tax slabs can choose for growth-based MIPs to enjoy higher returns and to reduce tax liabilities.

Top 5 Monthly Income Plans in India 

Monthly income plans are dynamic investments, where the returns generated are tied to market performances. Hence, it's not possible to pinpoint the best MIPs that work for all. Instead, we have listed some of the top-performing monthly income plans in India that have generated consistent returns over the last five years. 

S.No. Fund Name 1 Year Return 3 Year Returns 5 Year Returns
1 Kotak MIP 13.75% 13.81% 11.60%
2 ICICI Prudential MIP - 25 11.43% 14.36% 12.25%
3 HDFC MIP 12.48% 15.09% 11.76%
4 Franklin MIP 10.48% 13.57% 11.60%
5 SBI Magnum MIP 12.67% 13.11% 11.60%

 

*Note that returns from these funds are subject to change based on market fluctuations. Make sure to choose funds based on your investment goals and risk appetites. 

EndNote

Should I invest in Monthly Income Plans? 

There is no one answer. It is at the discretion of the investor. A monthly income plan is an excellent choice for investors who are looking to supplement their income. However, investors have to keep in mind that there is no guarantee of regular payouts.

Financial experts advise that adding a monthly income plan to your portfolio is a great way to grow your wealth in a disciplined manner. However, they also caution investors not to rely on payouts, as they are not guaranteed.