The scale and speed of the rally in the equity markets in recent months has caught the fancy of many investors, aggressive and conservative alike. There are many who believe markets have run-up too high too fast and entering the markets at this point is fraught with risk. One of the investment options for such investors is MIP (Monthly Income Plan) which have a mix of equity and debt. But are they really effective? Here we will discuss 5 features about MIP schemes:
(1) Stable returns: MIPs are a type of debt mutual funds tailored for people who need regular money to supplement their income. This income is however not guaranteed. MIPs offer good and stable returns across a period of time and more so when equity or debt is doing good. While the equity markets are bullish debt markets are also doing well. Debt markets in India are on a roll as they are factoring in a rate cut by the RBI in the medium term.
(2) Tailor-made solution: If you look at the portfolio mix of a typical MIP it is generally around 70-80% debt and remaining 20-30% in equity. These funds are hybrid breed of mutual funds for a not-so-aggressive and not-so-conservative investor and present an asset allocation which is like a tailor made solution.
(3) Actively managed: MIP schemes have their own advantages as they are actively managed schemes where debt and equity portion is dynamic in nature although they stick to the range provided in the offer document, but still the fund managers have the liberty to increase the equity or debt portion based on the changing scenario.
(4) Long term tax advantage: The 2014-15 Budget abolished the tax arbitrage enjoyed by debt funds by extending the tenure for long-term capital gains tax from 12 months to 36 months, and put a flat 20% tax rate after indexation if redeemed after three years. MIPs are a type of debt funds as the portion of equity is less than 65% which is the norm for qualifying as an equity fund. Hence, a debt mutual fund, such as MIP, will be tax-efficient if the investor can hold it for more than three years.
(5) Low risk: If you’re an ultra-cautious investor wary of investing in stocks directly, MIPs could be a safer entry point to get the best of equity markets debt with low risk.