Mutual fund schemes are one of the most popular ways to invest in India’s stock market. In addition to awarding inflation-beating returns and creating long-term wealth, this investment vehicle also provides tax benefits. But, this is not all!

Mutual funds (MFs) can also be a source of substantial monthly income. This primarily happens in two ways – through monthly income plans (MIPs) and systematic withdrawal plans (SWPs). Let’s understand both of them in detail.

What Are MIPs, And How Do You Earn Monthly Income Through Them?

A monthly income plan is a type of hybrid MF that ideally has a regular flow of dividends paid to investors every month. Due to this condition, mutual fund investments falling under this category invest 80% -90% of their corpus in debt and money market instruments. They offer moderate returns in exchange for low to moderate risk.

Who can benefit from MIPs?

MIPs are very beneficial for anybody who wants to conservatively expose their finances to the equity mutual funds market. Perhaps why so many MIP investors today are homemakers, retirees or those about to enter the golden phase of their life.

Also, freshers and individuals who are first-time investors in mutual funds can begin their MF journey by investing in MIPs.

How are MIPs taxed?

MIPs are taxed the same way as other mutual funds, meaning investors pay short-term capital gains (STCG) and long-term capital gains (LTCG) tax on them. Listed below is the taxation structure for MIPs.

If an investor liquidates their MIP units in less than three years, they will be liable to pay the STCG tax, which will be added to their annual income, and taxed as per their income bracket. However, if the investor liquidates their MIP units after three years, they will be liable to pay LTCG tax which stands at 20%.

Benefits of MIPs

Here are certain benefits you must consider before investing in a monthly investment plan.

High Liquidity

Monthly income mutual funds are relatively liquid as they don’t have any lock-in condition. So, not only can investors keep earning from dividends, they can quickly liquidate the entire fund whenever they want.

No Hidden Charges

Investors don’t need to pay any processing fees or entry charges while investing. What’s more, MIPs have a very low exit load fee of less than 1% of the entire investment corpus.

Substantial Steady Returns

MIPs are not a 100% guarantee of steady dividends. However, not giving assured returns each month is a rare scenario. This is because awarding a monthly income is their primary goal.

No Investment Limit

MIPs don’t have a stipulated upper limit for investment deposits. You can invest as much of a lump sum as you want in MIPs to earn steady monthly returns. 

Low Risk

Since MIPs predominantly invest their corpus in debt-oriented assets, they are low-risk investments.  

How are MIP dividends paid out?

Your Asset Management Company (AMC) or fund house is responsible for distributing the monthly dividends earned from your mutual fund portfolio. They are only paid when the fund makes a profit, and SEBI has not mandated a compulsory dividend declaration for MIPs.

What are SWPs, and how to earn monthly income from them?

SWPs or Systemic Withdrawal Plans are the second way to ensure a steady monthly income from mutual fund schemes. Through an SWP, you systematically transfer funds from your MFs into your bank account at fixed intervals, in this case, every month.

Think of SWPs as the opposite of SIPs, where you transfer funds from your account into mutual fund investment plans. For instance, suppose you can start an SWP to withdraw Rs. 20,000 on the 2nd of every month for the next three years.

As per these instructions, and the net asset value or NAV per unit determined on the 2nd of every month, your fund house will redeem mutual fund investments worth Rs. 20,000. After which, they will transfer the proceeds into your bank account via NEFT or any other arrangement you may have.

Who can benefit from SWPs?

SWP means liquidating your mutual fund investments in a way that pays you a monthly income. Unlike MIPs, these are not only debt-oriented. Here, you earn steady returns, depending on how you previously diversified your mutual fund investment portfolio, which can be more equity than debt or an equal mix of both.

SWPs are quite popular among individuals who are about to retire. A fixed monthly income from SWPs can act as their pension and even help them maintain their current lifestyle.

How are SWPs taxed?

Since SWP is not a type of mutual fund investment plan but just a slow and strategic way to withdraw money by liquidating pre-owned MFs, your monthly income may be taxed as per the income tax slabs. However, should you liquidate your MFs, you’ll have to pay short-term or long-term capital gains tax, depending on the duration of your investment.

If you liquidate your mutual funds in less than three years, you pay a short-term capital gains tax as per the income tax slabs. Whereas, if you liquidate your MF corpus after three years, you must pay a 20% long-term capital gains tax.

Benefits of SWPs

Regular Income

SWP provides a steady source of monthly income from mutual funds, which can tide over your cost of living and other lifestyle expenses.

Discipline

Since SWPs from mutual funds allow you to strategically withdraw only what you need, you shield yourself from withdrawing large sums of money impulsively.

Rupee Cost Averaging

An SWP shields you from market volatility. How? In a bull market, your fund house will have to redeem fewer units to provide you with the desired monthly income. However, went the market is on a bear run, meaning low, they will end up redeeming more units to provide you with the same monthly income. The logic at play is the same as a SIP, except, here, you’re liquidating units rather than acquiring them.

No Dividend Distribution Tax

Before awarding monthly income on mutual funds, a fund house deducts tax. So, once you receive the monthly proceeds, you’re not supposed to pay tax on it. There are no TDS applicable for SWPs. Although, if your monthly proceeds are high, you may pay tax as per your income tax slabs.

How are SWPs paid out?

Your fund house or AMC automates payments at pre-decided intervals. Suppose you want to liquidate a part of your fund’s corpus on the 10th of every month. They will do so, and the money will typically be credited instantly or within a couple of days.

In conclusion

If you want to earn monthly income from mutual funds, it’s best to opt for funds that beat inflation and witness low volatility. You can add short-duration debt funds, banking and PSU debt funds, corporate bond funds and conservative hybrid funds to your mutual fund portfolio. Investing a lump sum in these types of MFs can earn you an excellent chance of earning a steady monthly income for a long time.

To explore a variety of debt and equity mutual funds, SIPs, and other investment options, you can use Tata Capital’s Moneyfy app. It is user-friendly, goal-based, and perfect for beginners. Download now!

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