Use MIPs for higher returns

In a falling interest rate regime, monthly income plans will score over post office schemes due to equity exposure

Investors looking for a regular monthly income can choose between Monthly Income Plans (MIPs) offered by mutual fund houses or Post Offices. Both have their own advantages and disadvantages. While the former can offer higher returns, since they invest in market linked instruments, the latter is safer since it is guaranteed by the government. The Post Office schemes are very easy to invest in, due to which they are preferred by retired people. But MIPs are more tax efficient and hence, suitable for High Networth Individuals (HNIs)

Investors should invest in MIP or Post Office Monthly Income Schemes (POMIS) based on their risk appetite. While MIPs can offer higher returns as compared to POMIS; it also carries market risk and interest risk. On the contrary POMIS provide guaranteed monthly income, but do not meet the inflation 'risk'.

MIPs
MIPs are open-ended schemes that invest a majority of their assets in fixed income instruments and allocate a small portion to equity and equity-related instruments. MIPs typically invest in debt instruments like debentures, corporate bonds, government securities and so on, while maintaining a small exposure to equity to earn something extra.

Generally, the equity allocation is maintained between 10 per cent to 25 per cent of the total assets. This is a good option for those investors who are looking at regular and steady income and still want to dabble a bit in equities.

Like all other mutual funds, MIPs too come with the growth and dividend (Payout and Re-investment) option. The 'growth' option of an MIP is ideal for a 'moderate' risk profile, since it typically falls between a pure income fund and a balanced fund. It is a viable option for HNIs, institutions, trusts and so on, as these investors typically do not require a regular monthly dividend inflow, but still would like capital appreciation at controlled risk levels.

Investors can invest in such funds if they are conservative in their investing style and are looking out for better returns or are looking for a regular source of income. Also, this is suitable for investors in the high tax bracket, since it is more tax efficient than options like fixed deposits and post office monthly income schemes.

MIPs offer an investor regular income through the 'dividend' option. Since they invest in debt instruments, whenever the interest rate falls, the capital gain on bonds rises as price of bond increases and when interest rate raises, capital gain on bond falls.

Taxation of MIP's
MIPs are treated as debt funds and, hence, the taxation is same as debt funds. Dividends are exempted from tax in the hands of investors, since company pays a Dividend Distribution Tax on such dividend declared.

Redemption is covered by capital gains tax based on the holding period tenure.

Short-term capital gain- if the holding period is less than one year, the capital gain will be considered as a short term capital gain. It will be taxed as per tax slab

Long-term capital gain- if the holding period is more than one year, the capital gain will be considered as a long term capital gain. It will be taxed either 10 per cent without indexation or 20 per cent with indexation.

Long- and short-term capital loss- The good part of MIP is that any short term gains made on MIPs can be set off against short term losses. And long term capital gain on MIPs can be set off against long term losses.

Post Office Monthly Income Scheme (POMIS) is a guaranteed return investment available at the post office. On the deposit made in the post office, monthly assured return in the form of interest is earned. Though it offers no tax incentive, it is a preferred instrument amongst small savers because of its government backing that the product offers. However, there is an upper limit for investment into POMIS. You cannot invest more than Rs 4.5 lakh in a single account. If you invest jointly, the limit is Rs 9 lakh. The minimum investment is Rs 1,500.

Features of POMIS
The capital invested in POMIS is completely protected as the scheme is backed by the Government of India, making it totally risk-free with guaranteed returns. The amount invested is liquid, despite the fact that there is a six-year lock in period. However, the biggest disadvantage of POMIS is that it is not inflation protected, which means that if the inflation is the same as interest rate, then there is no real rate of returns.

Taxation of POMIS- It is taxed along with the regular source of income. However, Tax Deduction at Source is not applicable.

The writer is a certified financial planner