Risk-averse investors looking for a regular source of income can opt for mutual fund Monthly Income Plans (MIPs). These open-end funds are debt-focused and pay dividends. The returns generated by these funds are better than bank fixed deposits and even the post office monthly income scheme.
These hybrid funds are ideal for retirees or people about to retire who want some exposure to stock markets but are not willing to take high risks. Investors can place their savings in these funds according to their cash flow needs and even young investors can opt for the program to have limited exposure to stock markets.
Also Read: Mutual Funds: Making the Most of Volatility with SIP
Harshad Chetanwala, co-founder of MyWealthGrowth.com, says monthly plans or the monthly dividend option can work well for those who need money regularly to meet expenses or any commitments. “These expenses are more planned in nature. Nowadays, many investors also prefer the systematic withdrawal plan to meet their planned needs because they can have better control over their investment and withdrawal,” he says.
How do they work
These funds, also known as conservative hybrid funds, have a higher debt allocation and an equity allocation – around 75% to 90% of assets in debt securities and the rest (10% to 25%) in equities. – to generate additional returns on the overall portfolio. This is to ensure that a more volatile market does not have a huge impact on portfolio and returns.
Fund managers take moderate risk in investments and invest some of the pooled money in large, mid, small or micro capitalization companies and most in debt securities such as debentures, securities public and corporate bonds. Most of these funds offer full liquidity and operate like other diversified funds. There is no investment limit for MIPs and there is no blocking period either.
Dhaval Kapadia, Director, Investment Advisory, Morningstar Investment Adviser (India), says conservative hybrid funds offer a monthly dividend option for investors (usually retirees) looking for monthly cash flow to meet day-to-day expenses. “However, investors should note that income is generally distributed from any distributable surplus the fund has generated,” he says.
Returns are not guaranteed
As these funds have some exposure to equities, the returns generated may be higher than those of pure debt funds. Dividend payments depend on the performance of the fund and are not guaranteed. Investors should note that the returns of these funds are subject to market risk as the valuations of the underlying investments in these funds are market-linked and therefore not guaranteed like a fixed bank deposit or postal monthly income system.
Experts say investors are better off opting for the growth option and setting up a systematic withdrawal plan as needed. This gives more flexibility as the payouts are in line with the needs of the investor and not the type of dividend the funds declare at the end of each month. It can also work when payments are needed for a while and then restarted later.
The allocation of assets between equity and debt plays a key role in determining a fund’s taxation. Like interest income from FDs and post-income schemes, dividends from conservative hybrid funds (like all other mutual funds) are taxed in the hands of investors at the marginal tax rate. On the other hand, capital gains when held for more than three years are taxed (compared to time deposits and postal deposits) at 20% after indexation of fees, which particularly benefits investors in tax brackets. superior.
Monthly plans or the monthly dividend option can work well for those who need cash on a regular basis to meet expenses.
Conservative hybrid funds have a 75-90% allocation to debt and the rest to equities, so a volatile market doesn’t have a huge impact on returns
Dividends from conservative hybrid funds are taxed in the hands of investors at the marginal tax rate