Should you invest in Monthly Income Plans?

Investment experts recommend Monthly Income Plans (MIPs) to retirees and ultra conservative investors looking to invest a small part of their corpus in stocks. MIPs invest most of their corpus in debt and small part 15-32 per cent in stocks. However, retirees should remember that though they are called monthly income plans, they don’t offer monthly income.

“A Monthly Income Plan is basically a debt-oriented hybrid mutual fund scheme investing around 70-80 per cent of the total corpus into debt instruments like debentures, government securities, etc. The remaining part is invested into equity,” says Archana Bhingarde, Director, HIQ Financial Planners. The objective of these schemes is to provide steady income at regular intervals.

MIPs offer two options -- dividend and growth – to investors. Under the dividend option, the fund house offers regular dividends out of the distributable surplus. However, as said before, don’t assume that you will get monthly dividends from these schemes. “The name is misleading; scheme will declare dividends only when they have sufficient profit,” says Bhingarde.


It is not mandatory for a scheme, even if it is a monthly income plan, to declare dividends if it doesn’t have profits to distribute. The fund house might skip a month (quarter) in the absence of surplus.

If you opt for the growth option, you won’t get regular dividends. However, the profits would add to the NAV of the scheme. This option is suitable to investors who want their corpus to grow.

Should you invest?
“MIPs are best suited for retirees, housewives and people seeking some additional income or extra returns over and above what they are earning through fixed deposits,” says Bhingarde, who believes that investors can expect around 10-12 per cent from MIPs.

However, if you are planning to take a little exposure to stocks via MIPs, you should pay attention to how much the scheme can invest in stocks. There are many MIPs in the market that invest as high as 32 per cent in equities. Investors, especially ultra conservative retirees, should make sure that they are okay with the equity exposure. A very large exposure may result in high volatility.

Also, retirees should keep in mind that they can’t expect monthly income from these schemes. You can expect steady income when the market is booming. However, the periodicity of dividends may decrease during market downturn.

Another limitation of MIP is how the returns are taxed. Since these schemes invest most of their corpus in debt, they are categorized as debt schemes for the purpose of taxation. If investment are sold before three years, the gains would be treated as short-term capital gains. Short-term capital gains are added to income and taxed according to the income tax slab applicable to investors. If investments are sold after three years, returns are considered as long-term capital gains and taxed at 20 per cent with the indexation benefit.

If investors can earmark a small part of their total portfolio to invest in equity and invest in a pure equity scheme that invest the entire corpus in equity, they can overcome the issue unfavourable taxation. Investments in equity mutual funds qualify for long-term capital gains tax (zero at the moment) if investments are held for more than a year. If investments are sold before a year, short-term capital gains are taxed at 15 per cent.

Though investors do not have to pay tax on dividends received from debt schemes, the fund has to pay dividend distribution tax of 28.84 per cent on dividends declared. This means that it doesn’t make sense for investors in the lower income tax slab of 10 and 20 per cent to opt for the dividend option in an MIP.