Your company has given you a superb bonus or your savings have just added up to a nice seven figure sum. So what are you planning to do with it? You'd love to earn some money off it, except that fixed deposits barely give you any returns these days and everything else is too risky. So if you're about to hide the money under your pillow only to start dipping into it every now and then for a shopping spree, we suggest you take a look at MIPs (Monthly Income Plans). No, they are nothing like SIPs (Systematic Investment Plans).
So what are Monthly Income Plans? As Investopedia explains it, MIPs ensure you receive a stable amount of funds each month to spend, which limits the risk of over-spending. Plus, you don't land up making random withdrawals and depleting your capital. But are they monthly income?
1. They are not monthly income.
When you think of Monthly Income Plans, you think a monthly income naturally. But the name itself is quite misleading. MIPs assure returns through the payment of monthly dividends. However, this is subject to the availability of distributable surplus. So, while fund houses try their best to pay investors regularly, this is not guaranteed.
2. They are decent short-term investments.
Say you have a sum of 'nest egg' money (that is money you have collected for a specific purpose like your wedding or a down payment on a home). You will definitely need the money in the short term. At the most you can stay invested for two or three years, not more. In this case, MIPs are not a bad option.
3. They are not risk-free.
MIPs are dependent (to some extent) on the market. Though not completely equity-driven, your money is invested in equity as well as debt. About 15 to 25% is invested in equity and the rest in debt. So while these investments are relatively safe there is no guarantee that the markets won't crash and some of your capital could bear the brunt.
4. They are better than FDs.
Fixed deposits were once upon a time touted as the best short-term investments but not anymore. MIPs outgun FDs on two counts. Firstly, the dividend from MIPs is tax-free while FD interest is taxable. Moreover, banks deduct 10 to 20% as TDS so if you are not eligible for that amount of tax, you'll have to run around for a refund. Secondly, while FDs give you about 6 to 7% returns per annum, MIPs could give you 10 to 12%. But then again, that's because of the marginally greater risk involved in equities.
MIPs are ideal if...
So what are Monthly Income Plans? As Investopedia explains it, MIPs ensure you receive a stable amount of funds each month to spend, which limits the risk of over-spending. Plus, you don't land up making random withdrawals and depleting your capital. But are they monthly income?
1. They are not monthly income.
When you think of Monthly Income Plans, you think a monthly income naturally. But the name itself is quite misleading. MIPs assure returns through the payment of monthly dividends. However, this is subject to the availability of distributable surplus. So, while fund houses try their best to pay investors regularly, this is not guaranteed.
2. They are decent short-term investments.
Say you have a sum of 'nest egg' money (that is money you have collected for a specific purpose like your wedding or a down payment on a home). You will definitely need the money in the short term. At the most you can stay invested for two or three years, not more. In this case, MIPs are not a bad option.
3. They are not risk-free.
MIPs are dependent (to some extent) on the market. Though not completely equity-driven, your money is invested in equity as well as debt. About 15 to 25% is invested in equity and the rest in debt. So while these investments are relatively safe there is no guarantee that the markets won't crash and some of your capital could bear the brunt.
4. They are better than FDs.
Fixed deposits were once upon a time touted as the best short-term investments but not anymore. MIPs outgun FDs on two counts. Firstly, the dividend from MIPs is tax-free while FD interest is taxable. Moreover, banks deduct 10 to 20% as TDS so if you are not eligible for that amount of tax, you'll have to run around for a refund. Secondly, while FDs give you about 6 to 7% returns per annum, MIPs could give you 10 to 12%. But then again, that's because of the marginally greater risk involved in equities.
MIPs are ideal if...
- You want to protect capital against inflation.
When you are saving up for something like a foreign vacation or a down payment on a home etc where rates are likely to fluctuate due to inflation, MIPs are not a bad bet. They give you decent returns. Plus, you can further invest the dividend you receive protecting your capital against inflation all the while. - You have retired/ are planning to retire!
MIPs are better for those who are not earning a salary and need a regular flow of income. You could use the dividend payments for personal expenses, monthly bills etc without eroding your savings.
So if you think MIPs work for you, consult DENIP Consultants Private Limited - (022) 40156688 / 40156699 or email us at dewang@denip.in or nimesh@denip.in
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