As per conventional investment planning in our country the investments of senior citizens of retirees comprised wholly of only fixed income or debt. Since investments are the only source of income for retirees, risk was the most important factor in investment planning. As such, fixed income or debt, which is the lowest risk asset class, was thought to be the only suitable investment for retirees. However, increased longevity with advancements in healthcare, is forcing many retirees to look beyond fixed income investments, because in an inflationary environment fixed income returns may not be sufficient to meet the income needs of retired investors for a very long period of time. Asset allocation rules suggest that, even retired investors need some exposure to equities to beat inflation and sustain their lifestyle for a long period of time.
Mutual fund monthly income plans are hybrid debt oriented mutual fund schemes where the debt allocation ranges from 75% to 95% and the equity allocation ranges from 5% to 25%. The primary objective of monthly income plan(MIP) is to provide regular income to investors and also some capital appreciation over a sufficiently long investment. The capital appreciation can help investors beat inflation in the long term. The debt component of Monthly Income Plans lowers the volatility, provides stability and generates income for investors. The equity portion of the portfolio provides a kicker to returns over a sufficiently long investment horizon and can help investors beat inflation.
Historical data shows that, mutual fund monthly income plans can give significantly superior returns compared to traditional fixed income investments like bank Fixed Deposits and post office small savings schemes (like Monthly Income Scheme, Senior Citizens Savings Schemes). Top performing mutual fund monthly income plans like Reliance Monthly Income Plan, Aditya Birla Sun Life MIP II – Savings 5 Plan, HDFC MF Monthly Income Plan – Long Term Plan, Aditya Birla Sun Life MIP II – Wealth 25 Plan etc, have given around 10% or more compounded annual returns over the last 10 years.
Though mutual fund Monthly Income Plans are subject to market risk, the high debt component reduces the risk of capital loss considerably. The volatilities of Monthly Income Plans are considerably lower than equity or balanced funds. Post 2008, investors of top performing Monthly Income Plans never made material annual losses.
Mutual fund monthly income plans are also much more tax efficient than traditional fixed income investments like bank Fixed Deposits (FD), Post Office Monthly Savings Schemes (MIS), Senior Citizens Savings Schemes (SCSS), company Fixed Deposits (FD), life insurance pension annuity plans etc. Interest paid by FDs, MIS, SCSS, annuities etc are taxable as per the income tax slab rate of the investor. Profits or returns from mutual fund monthly income plans are also taxable as per the income slab rate of the investor for investments held for less than 3 years. However, for investments held for more than 3 years, the profits from mutual fund monthly income plans are taxed at 20% after allowing for indexation benefits. Indexation benefits reduce the tax obligation of investors and the effective tax rate is much lower.
Monthly income plan is not just suitable for retirees. It is suitable for any investor with moderately conservative to conservative risk appetites. Over a long investment horizon the risk return trade-offs in the mutual fund monthly income plans is quite favourable. Top performing monthly income plans have excellent monthly dividend pay-out track records. Investors can also get regular monthly cash-flows from mutual fund monthly income plans through Systematic Withdrawal Plans (SWP). Monthly income plan is a great investment option for investors looking for both income and capital appreciation.