Understanding monthly income plans and their benefits

If good returns with a supplementary source of income are what you expect from your investment, look no further than monthly income plans.

What is your expectation from the money you invest? Do you merely wish to see steady growth or do you want the investment to return as a second source of income? The very least your investment must do is multiply and provide you with regular income. But there are tonnes of investment options out there, so it can become a little daunting to choose the most suitable one.

Start yourself on the road to financial success with a highly useful investment instrument known as the ‘monthly income plan’.

What are Monthly income plans?

A Monthly Income Plan (MIP) is, as stated above, an investment product that helps one secure his finances for the future. When you buy a monthly income plan, about 80% of the corpus is paid towards investment in debt instruments, while the remaining in invested in cash or equity securities. Thus, it is a debt market oriented mutual fund with the potential to provide periodic income via dividends. The money is invested in such debt instruments as corporate bonds, Government securities and debentures. Thus, the growth of the monthly income plan is assured, though the nature of the investment is a long term one. It also needs careful study of the prevalent interest rates to monitor the fund performance better.

Choosing the best monthly income plan

When looking for the best monthly income plan, look for one that is rated highly in its category and has strong recommendations from prominent business publications in the country. Some MIPs also receive awards for the best rate of growth and overall performance. Keep a lookout for customer testimonials as well – they offer the best inputs on which plans to buy.

However, the plan you choose depends on your financial outlook and long term goals. You will be better served exploring another investment option if you seek short term gains. Monthly income plans are useful for the medium to long term. The plan must adjust itself to realign with smaller equities in markets that see a reduction in debt returns – this assures returns on the plan despite declining interest rates. It is prudent to remember that every monthly income plan carries a moderate risk.

However…

• MIPs may not declare dividends every month, and certainly not in the first month right after investment. At a later stage, dividends are not declared owing to poor market performance.
• The returns are accounted for in terms of the prevalent interest rates. The equity component of the MIP helps to offset the rise and fall in market rates.
• Monthly income plans are taxed just like other debt funds in India.