Do MIP or
Monthly Income Plans give Monthly income? – Answer is NO
They are
wrongly named.
So then, does
it deserve your money?
Have you come across fund schemes
given below?
·
Birla Sunlife MIP II – Savings 5
·
Birla Sunlife MIP II – Wealth 25
·
HDFC Children’s gift fund
·
HDFC MIP
·
HDFC Multiple Yield Fund
·
HDFC Retirement savings fund
·
ICICI Pru Child care plan
·
ICICI Pru MIP
·
SBI Regular Savings Fund
·
Sundaram Regular Savings Fund
There are many more similar ones from almost each and
every fund house.
All these schemes fall under a category called Monthly
Income Plans or MIP. While several of them have the words MIP
or Monthly Income Plan included in their names, that’s not a prerequisite. See
the examples used before.
What is a Monthly Income Plan or MIP?
An MIP is what you call a hybrid investment with a mix of
debt and equity components. The debt portion is typically more than 70%, rest
is invested into equity.
The idea behind an MIP is to attract that investor who is
not so happy with the returns of aBank Fixed Deposit and is willing to take a small risk to
get a better return.
So, the financial engineers working at the mutual funds
created the MIP. The debt portion provides the safety to the portfolio where it
relies on bonds to bring in more certainty. The equity portion is expected to
bring in that extra kicker of returns.
So, do you get a monthly income?
To get a monthly income, you will have to choose a monthly
dividend payout option. Strange as it may sound!
The irony is you can actually choose a growth option in a Monthly Income Plan where the
value of your holding keeps going up.
By the way, the dividends are not guaranteed. If the fund
manages to make money, it will announce a dividend. If push comes to
shove, they may even sell existing investments within a fund to generate cash
to pay the dividend (income).
Then why are they called MIP?
Well, that’s the job of the marketing department. To
enhance its appeal to a low risk, income seeking investor, it was named as an
MIP. In fact, they went a step ahead and used some emotional hooks such as
child, retirement, etc. See the example names mentioned at the beginning.
What about taxation?
That’s an important question. An MIP is taxed like a debt fund.
It means that if you sell the fund before 3 years of buying, the capital gains
are taxed as per your income tax bracket.
However, if you sell it after 3 years, you get to index
your cost and pay a lower tax at 20% of the cost indexed capital gains.
From a taxation point of view, it is more efficient on a 3
year plus holding basis, as is any other debt fund.
Also, while the dividends are tax-free in your hands, the
fund pays a 28.84% dividend distribution tax on your behalf, which is
ultimately charged to the fund expenses.
Ah, expenses. What kind of expenses do these funds charge?
Expenses is a touchy topic. If you were to look at
the structure of MIPs, the most aggressive ones hold about 25 to 30% equity and
the rest in debt. The debt portfolio is also in medium to long term bonds.
The expense ratio of Birla SL MIP – 25 is about
0.89%. For HDFC MIP – Long term plan, the expense ratio is at 1.26%. The number
for ICICI Pru MIP is 1.81%.
Does it make sense to invest in an
MIP?
The benefit of having an MIP is the auto rebalancing in
the fund. Since it strives to maintain a pre-defined ratio of debt:equity, it
keeps rebalancing the portfolio to maintain the ratio.
For those who cannot take the effort (basically, you are
lazy) to maintain a similar asset allocation may be better off using an MIP.
But overall it is a disaster. You see you
include equity investment in a fund, take on the risk associated with equities
and yet get taxed like debt.
If you know, an equity fund after 1 year of holding
attracts zero tax on capital gains. But for MIP, the taxation is as mentioned
earlier.
What’s the alternative?
The alternative is to choose a pure debt fund or bonds for
upto 70% of the portfolio and invest the remaining money into an equity fund.
The further caution is don’t chase the returns only.
A Birla SunLife MIP was able to deliver a 21% 1 year
return for specific reasons in investment choice. It is unlikely to replicate
it in the future.
As far as returns are concerned, your expected returns
will be in line with the broad asset class expectation.
Take these facts into consideration before you make your
investment into an MIP.
Rajiv Kapoor
Practicing Company Secretary
Kanpur
9839034761
