Every month your salary is credited. You pay for expenses and save some of it. But what happens when that income stops? Or is your primary income enough for emergencies? The immediate response may be a term plan, but they pay a lump sum to the nominee at maturity or upon death. But one must look past them and invest in mutual funds via Monthly Income Plan. Monthly income from mutual funds provides regular cash inflow to investors for an extended period even after retirement. Let us see how they work.
What are Mutual Fund Monthly Income Plans?
A Monthly Income Plan (MIP) is a mutual fund scheme that invests primarily in a mix of debt (80%) and equity (20%) securities. MIP mutual funds invest money in low-risk securities like preference shares, dividend stocks, and fixed income securities. The main purpose of a MIP is to provide a steady flow of regular income to investors in the form of dividends or interest payments.
A monthly income scheme in mutual fund is an ideal investment for investors without a regular income source, senior citizens and retired people. But even if you have a steady income can invest in MIP to create an alternate cash inflow.
Types of Mutual Fund Monthly Income Plan
There are two types of Monthly Income Plans that one can invest in:
- Dividend-based MIP Mutual Funds
These monthly income schemes pay monthly dividends to the investors. However, the fund house has to pay taxes on dividends, so the amount investors receive is dividend minus dividend distribution tax. These are ideal for investors looking for regular pay-outs.
- Growth-based MIP Mutual Funds
These MIPs do not make regular payments to the investors. Instead, the fund house adds all profits to the capital. Investors receive their share of capital and profits when they redeem their fund units. Growth-based MIPs are best for investors looking to create wealth over a long term.
Key Features and Benefits of a Mutual Fund Monthly Income Plan
The following list of features and benefits make Monthly Income Plans an attractive investment:
- Earn Higher Returns
MIP mutual fund monthly returns are generally higher than returns from other investments like fixed and recurring deposits. Since these schemes also invest in equity, they generate higher returns compared to pure debt funds. You can easily get returns in the range of 11% to 15%.
- There Is No Cap on Investment Amount
Unlike many other investments, Monthly Income Plans do not have a limit on the maximum amount that you can invest. Also, you can choose to pay the premium in a lump sum or at regular intervals (monthly, quarterly, half-yearly, or annually). Higher the investment amount, higher the monthly income from mutual funds.
- Monthly Income Scheme in Mutual Fund Are Very Liquid
Keeping your investments till maturity is the best way to earn maximum returns. But it is much better to be able to liquidate your investments in case you need immediate cash. For that matter, MIPs do not have a lock-in period so that you can withdraw your investment at will.
- There Are No Additional or Hidden Charges
You do not have to pay any processing or entry fee while investing in a Monthly Income Plan. In case you withdraw your investment, the exit fee is not more than 1%. So, you just pay the premium and earn a stable monthly income.
- Monthly Income Plans Are a Convenient Investment
MIPs are a convenient investment for passive investors because there is no need to time your investments and keep track of funds’ performance.
Mutual Fund Monthly Income Plan Terms and Conditions
A Monthly Income Plan’s terms vary depending on the insurer. Here are some of the most common ones:
- Minimum and Maximum Entry Age
The minimum age to enter a MIP is 18 years, but some insurance providers have minimum age set to 0 years. The maximum age to get a MIP range from 50 to 65 years.
- Maturity Age
You can easily get a MIP for 60 to 80 years.
- Premium Tenure
Premium payment tenure is generally between 5 to 15 years.
- Policy Tenure
Policy tenure ranges from 10 to 30 years.
Things to Keep in Mind Before Investing in Mutual Fund Monthly Income Plan
Before you go ahead and invest in MIP mutual funds, there are some things you should note:
- Dividend Payments
Investors only receive dividends if the fund makes profits. Also, investors receive only a part of their share in dividends because AMCs keep the rest for future payments in case of negative performance.
If you want to build a corpus over time, you can opt for growth option. Any profit would be added to the NAV of mutual funds instead of being distributed as dividend.
Income from MIP is taxable under short-term and long-term laws for capital gains. If you redeem units before three years, you pay short-term gains tax in your bracket. Long-term gains tax applies on units’ redemption after three years.
On the other hand, dividends are not taxable for investors because the fund house already pays dividend distribution tax.
Monthly Income Plans provide monthly income from mutual funds, which makes them great for investors looking for a stable source of income. MIPs are particularly a life-saver for senior citizens and retirees as they get to invest in mutual funds with monthly returns giving a cash inflow to meet their expenses in old age.
MIPs are also a perfect monthly income scheme in mutual funds to leave behind a legacy for your family. Upon death, nominee family members continue to receive monthly income from mutual funds till the term expires.
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