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Looking for the right monthly income plan? - Views on News from Equitymaster
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  • Sep 14, 2001

    Looking for the right monthly income plan?

    Monthly income plans (MIPs) are particularly attractive for investors who are looking for a steady income stream. Retired individuals and investors approaching retirement are best suited to benefit from MIPs.

    The various options available under MIPs are bank deposits, post office monthly income scheme (POMIS), mutual funds and fixed deposits (FDs) of manufacturing companies.

    • Bank deposits:
      Bank deposits are relatively safe and there is low credit risk. However, investors must stick with the reputed banks and avoid shady banks no matter how attractive the interest rate may be. Co-operative banks (Bank of Karad, Madhavpura) have disappointed fixed deposit holders in the past and investors had to forfeit even their capital. In terms of returns, bank deposit MIPs are not too different from the annual option and the rate of interest fluctuates between 8-9% depending on the bank.

    • Company deposits:
      Even with manufacturing company FDs, investors should stay with bluechip companies with a reliable track record. For this investors need to check the credit ratings of these companies. The table below shows returns of some credible companies in their monthly income option. Senior citizens need to note that companies like HDFC and Dewan Housing offer higher interest rates (normally 1%) for them. Before investing an investor should always look at the profit and loss account, the balance sheet and dividend history of companies, which is given in the application form itself.

      Fixed deposits MIPs Rate Rating Minimum (Rs.)
      HDFC ltd. 8.50% AAA 20,000
      ICICI Home fin 9.30% AAA 20,000
      Bajaj Auto fin 9.50% AAA 25,000
      Dewan housing 10.50% AA 20,000
      Kotak Mahindra 8.75% AAA 21,000

    • Post office monthly income scheme (POMIS):
      These monthly income schemes are favoured by investors particularly for their attractive returns (9.5% p.a.) with an additional 10% on maturity on the amount deposited. Also the safety level is high as it is backed by the Government of India. However these schemes lacks liquidity as there is a 6-year lock-in period (min. invest. Rs 6,000). Also, investors may not earn interest at the same rate if the government decides to slash the interest rate in the Union Budget.

    • Mutual funds monthly income plans:
      Earlier except for the Unit Trust of India (UTI) other private players had not explored MIPs. It is only last year that private players (Pioneer ITI , Birla Sunlife, Pru ICICI, Reliance) realised the enormous potential of MIPs and launched them in a big way. In the table below we have taken only 5 mutual fund MIPs, three of which have a 1-year history.

    Mutual funds Growth Min. Inv. (Rs)
    Templeton MIP (MD) 12.2% 10,000
    Sun F&C MIP (MD) 11.4% 10,000
    Alliance MIP (MD) 6.3% 5,000
    Birla MIP (A) (MD) 10.8%* 25,000
    Pioneer ITI MIP (MD) 14.8%* 25,000

    * Growth since inception, as these funds don't have a 1-year history.

    Of the four options in monthly income schemes, mutual funds offer highest liquidity and returns are comparable with other investment avenues like bank and company FDs and POMIS. Moreover, dividends from MIPs are tax free in the hands of investors as opposed to a FD, which is taxable. However a major negative with mutual fund MIPs is that returns are not assured as opposed to FDs and POMIS where an investor is assured of a rate.

    In view of this comparison, the younger investment community (below 40 years) can look at mutual fund MIPs, while investors over 40 years should look at more stable MIPs like FDs and POMIS.

    If you are in Mumbai and would like to invest in mutual funds, please register here.



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