Small BusinessMIPs: Good last option for retirees
These days, you will see few fund houses promoting their monthly income plans (MIPs). With returns improving due to the stock market rally, MIPs have started looking more promising.
- For an untimely death... - Monthly plans start giving positive returns - Debt funds default on dividend payouts - Keep it simple
Out of 39 funds in the category, eight have given over 20 per cent returns in the past one year, while 16 have given 12-20 per cent returns. Despite their performance, financial planners say these are not for everyone.
These funds invest 0-30 per cent of the money in equity and the rest in debt and give investors regular income in the form of dividends. As most people need regular income after retirement, these funds are usually recommended to retirees. This doesn’t mean the fund will give monthly or quarterly returns. The dividend depends on the surplus generated through investments.
The debt portion gives stability to the corpus and while the equity component ensures more returns. This way, theoretically, an investor can make more money than other debt funds. But this is not the only reason for their performance. According to investment advisors, the journey of equity markets from 8,000 levels to over 16,000 has pushed up returns. “Last year was fabulous for debt too. As interests rate fell, bond yields went up,” said a certified financial planner. He thinks it is difficult for the trend to continue.
Though such high returns may not continue, these plans come in handy for those who are already done with other debt investments. Let’s take an example of a person who has retired at 60 and has Rs 40 lakh to invest. According to financial planners, the first part of the corpus should always be put in an assured return product. So, the retiree should put the first Rs 15 lakh in the senior citizens savings scheme. Then, there can be another stable product such as the post office monthly income scheme. Some part of the corpus will go towards medical insurance, contingency fund and so on. After all these avenues are exhausted, an MIP can be an additional investment. It should be the last product where he should invest as it carries more risk than a bank fixed deposit. As two asset classes are involved, a person needs to understand the risks associated with each.
Equity is the most volatile asset class and can eat into even your capital. The same can happen with bonds. There have been times when most MIP funds have given negative returns and zero dividends.
In fact, even currently, returns from the Baroda Pioneer MIP on September 28 were -0.06 per cent.
That’s why some financial planners say that investors can replicate the MIP model in their portfolio. If you have Rs 10 lakh surplus, you can invest upwards of 70 per cent in a fixed deposit. The remaining, 5-20 per cent, can be put in a good equity mutual fund through a systematic investment plan. “This way the person will have a guarantee of returns,” said Mukesh Dedhia, director, Ghalla & Bhansali Securities.
“This can be followed as long as the person is willing to take the taxation part into account,” said Malhar Majumder, principal financial planner, Black and White Financial Managers. Whatever returns MIPs give are tax-free in the hands of the investor while interest from fixed deposits is clubbed with the income and taxed accordingly.