Pursuant to the adage that a man may do what he likes with his wealth is the line of thought: ‘How does one create wealth in the first place?’ This is a question that has puzzled legions of salaried and self-employed people from time immemorial. While there are several answers to this question, there are only a few that actually work.
The world of wealth incorporates skill, a risk appetite and a propensity to strike when the time is right – those with all three attributes do well in the equities and debt markets. If you possess these attributes, you might consider an instrument known as the Monthly Income Plan (MIP) – this is a plan that helps gain returns from the equity mutual fund market.
Why Monthly Income Plans (MIP)?
Salil Maneshinde* (40) was recently ‘gifted’ Rs 10 lakh by an uncle before the latter passed away in Pune. “My investment advisor spoke to me about purchasing an MIP so that I could get a supplementary source of income even as I earned from my job as a human resources manager,” Salil explains. “My advisor said that it was a guaranteed way to make an income from equities and that it would also safeguard my loved ones in case I was absent in the future.”
An MIP is a participating plan in which about 25% of the premiums paid are invested in equities. The income is paid out in periodic dividends, where one may choose a monthly pay-out option. The income is tax deductible and paid till the policy is live, or it is paid in a lump sum (or periodically) to the plan holder’s family in case of his unfortunate demise.
The pay-outs and taxation
Monthly Income Plans of mutual funds offer higher returns than most other instruments. Under the dividend portion of the scheme, the pay-outs are made from the capital appreciation portion while the principal investment is left untouched. However, the dividend pay-out may vary in quantity and frequency based on market performance. Hence, investors can opt for the Systematic Withdrawal Plan (SWP) for regular periodic payments. The SWP route works better, however, for large investments.
The gains from MIPs are considered debt funds. The dividends are paid after the mutual fund house deducts the DDT (Debt Distribution Tax) from the amount. Gains from MIPs are taxed at 10% without indexation and at 20% with indexation.
However, cautions investment advisor Rakesh Singh*, one must be aware at the outset that the pay-outs under MIPs can be lower in case the markets fall. “For those with a lower risk appetite, I recommend that they take SWP to ensure a regular cash inflow when the markets perform poorly. However, those looking to invest their funds to plan for retirement or those already in the retirement stage can consider other options such as bank FDs or monthly income scheme (MIS) where returns are more regular than an MIP.”