How and When to use Mutual Fund Monthly Income Plans

Published: May 7, 2016 at 8:34 am

Question: When can you use an investment portfolio that cannot exceed an equity allocation of about 25%? Value Research classifies them as Hybrid: Debt-oriented Conservative. There are about 43 funds in this category and more than half of them contain the phrase “monthly income plans” (MIP) in their names. Some are called regular savings funds (not to be confused equity savings funds). Some are called ‘regular income funds’.

I do not know the origins of the MIP funds. My guess is they were designed to be debt funds with a small dash of equity funds for that ‘extra return’. Probably called monthly income plan because the fund manager can attempt to book some profit (not too much) each month and pass it on as a dividend (after a hefty DDT tax is deducted) if the dividend option is chosen. So they probably wanted to sell these as an alternative to the monthly income plans from the post office and banks.

The misleading title ploy seems to have worked. Many want to choose these for ‘better returns’ without understanding the risks involved. Now, you might think there is only a max of 25% equity.

monthy-income-plans

These are the max and min returns of 22 MIP funds in the last 10 years. Notice the negative and near zero returns. A ‘2008’ is not necessary for these funds to offer -ve returns. Though the equity is only 25%, many of these funds dabble in long-term gilts, making the portfolio quite volatile.


Over 3,5 and 10Y, these funds have returned anywhere between 5% to 10%. These are not long-term periods where you can switch funds.

Many AMCs suggest minimum holding period of 1-3 years for these funds!!  If you want to choose these funds (I think  you don’t need them), I would recommend a holding period of at least 7  years. Do not expect anything great in terms of returns. They can vary a lot! In any case, always choose growth. Never dividends.

For intermediate-term goals (5-10Y),  75-80% of ultra short-term debt fund or short-term gilt + 25-20% of an equity fund should work well.  The same portfolio will also work well for retirees who wish to allow part of their corpus to grow.

The main problem with these MIPs is the debt portfolio. It resembles a masala Khichdi. The current average portfolio ranges from 0.16 years to 13/14Y!! So any thing from a ultra short-term bond fund to long-term gilt fund can be an MIP!

That does not worry me so much. Many of these funds can invest in any kind of debt. While choosing a fund, I need to know where the fund will not invest. This defines risk. Since it is hard to do that with these MIPs, I would prefer to construct my own portfolio.

‘Hey, wait a minute. You like equity oriented balanced funds and have called them a low risk, high reward option. So why are you against debt oriented balanced funds?’

A portfolio with 65-70% equity = 100% equity. So for all pratical purposes equity oriendted balanced funds are equity funds with a good risk vs reward balance.

A portfolio with 20-25% equity  is not of much use for long-term goals (not beat inflation after tax) and can be quite dangerous for short-term goals. Plus the  Khichdi argument made above. They are quite capable of causing  monthly stress with or without monthly income. Stay away.

Do share if you found this useful

For a short of time, enjoy a 40% discount on our online course: Goal-based portfolio management! Join 1863 members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 Rs. 1800 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 520+ members are now part of our new course, How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner wanting more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills, building a community that trusts you and pays you!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners on a monthly basis
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps