Monthly Income Plan (MIP): Definition, Investments, Taxes

What Is a Monthly Income Plan (MIP)?

A monthly income plan (MIP) is a type of mutual fund strategy that invests primarily in debt and equity securities with a mandate of producing cash flows and preserving capital.

An MIP aims to provide a steady stream of income in the form of dividend and interest payments. Therefore, it is typically attractive to retired persons or senior citizens who do not have other substantial sources of monthly income. 

Understanding Monthly Income Plans (MIPs)

As a mutual fund scheme, a MIP's asset allocation can vary. Some, for example, invest upwards of 30% of its corpus in equity securities. Others aim to keep this investment type at 10% or lower. Regardless of the approach, the bulk of investments are in debt securities to target steady returns with a portion dedicated to maximizing profits through equity exposure. The types of equities invested in vary as well. Some funds limit equity exposure by focusing primarily on small, medium, or large-sized companies. Others will use a mixed approach. 

Even though these funds are called monthly income plans, MIPs do not guarantee monthly income. Investors may expect a steady stream of income when the market is strong but could see a downturn in bear markets. The level of equity exposure is affected by market volatility. Since stock holdings are more prone to fluctuations in price, they are usually a limited portion of the entire fund.

Mix of Investments in MIPs

Investors need to pay close attention to their income needs and risk tolerance when deciding whether to invest in an MIP. There is no obligation for the fund to make monthly dividend payments. When profits are weak, it may skip making payments altogether. In fact, the Securities and Exchange Board of India (SEBI) does not allow mutual funds to guarantee income or dividends.

For the right investor, an MIP can offer steady income for retirement living. Problems arise when people reach retirement and spend their nest egg, making random withdrawals of varying amounts to support their monthly expenses. A monthly income plan can deliver a stable sum of income each month, which allows for more accurate monthly budgeting. Careful monthly budgeting can help avoid the risk of overspending. The same objective is present in an annuity. 

Taxing of MIPs

In the United States, MIP funds are taxed using standard interest and dividend calculations. In India, an MIP is treated as a debt scheme for taxation purposes. Indian tax law applies this moniker to any fund that invests less than 65% of its assets in stocks.

As with other funds, earnings from investments sold before one year are short-term capital gains. Short-term gains in the U.S. are counted as income and subject to the investor's income tax slab. Sales occurring after the one-year threshold are long-term capital gains, taxed at either 15% or 20% (depending on taxable income) with an indexation benefit.