Gap or discontinuation of your regular source of income due
to any mishap can lead to disastrous situations and especially if someone has a
single breadwinner in the family. The chaos because of the mishap is added by
the financial uncertainty due to loss of the income. Most of the people are in
the misconception that a regular insurance
policy which pays out a lump sum amount at the time of claim will fulfill
all their financial requirements, but you need to understand that a major
portion of your claim amount is spent on the recovery of the mishap and you are
left with no any stable source of income for your future. But a monthly income
plan can wipe out all such worries as it gives you an alternate source of
income for you and your loved ones.
A monthly income plan is a hybrid investment scheme in which
15-20% of the portfolio is invested in equities and the rest in corporate bonds
and government securities. The returns which you receive through your MIP are
market driven. MIP is for providing monthly income for the buyer, but the
periodicity depends upon the option (monthly, quarterly, half-yearly and
annual) chosen by the investor. With so many advantages, MIP has some disadvantages
also. So let us understand the pros and cons of a Monthly income plan through
this article.
Advantages of Monthly
Income Plan
·
A
conservative investment option
It is good for people who are conservative in
their investment, but want to earn better returns than a debt only portfolio. In
a MIP, 70-80% of the total corpus is invested in debt instrument like
debentures, government securities, etc., while a small equity exposure is
maintained to earn something extra. A fixed income instrument is what a
conservative investor looks for but sometimes they look for a return above
investment and exposure to equity is the best option for such return, which is
provided by MIP.
·
Replacement
for your regular income
If your regular source of income suffers a
setback then a monthly income plan acts as a replacement for your regular
income by providing fixed monthly income over a long duration of time. It also
wipes out the dilemma of investment and saving decision regarding the claim
amount received as a lump sum. Many people are not good at financial decisions
of saving and investment, especially when it comes to huge amount of money. Such confusion leads to loss, which is
generally seen when the family receives a huge amount of money at once from
their insurance policy. But a
monthly income plan wipes out such confusion because the benefit is given on a monthly
basis as an alternative to the regular source of income.
·
Periodic
balancing of equity-debt ratio
The periodic balancing of the equity debt
ratio allows your allocation to be balanced when equity performs well and debt
may see a drop or vice-versa. For example, you have invested Rs.1000 in MIP in
which Rs.750 is invested in debt and the remaining Rs.250 is invested in
equity. So the debt-equity ratio in such case will be 750 : 250. Now let’s
assume that the equity suffered a loss of 27%, while the debt remains steady
with 9% return. Due to this condition,
the ratio will become 817.5 : 182.5. This allows restoration of balance due to
periodic balancing. If both equity and debt perform well, then you may get
rewarded in the form of high dividend payout or allocate the same in a balanced
ratio for reinvestment.
·
Tax
efficient
Monthly income plans are more tax efficient
in comparison to FDs. All the dividends declared under a Monthly income plan
are tax free while income from FDs is taxable and is taxed depending on the
income bracket of the person. And if the interest income exceeds Rs.5000/- in a
financial year, then TDS is applicable.
Disadvantages of
Monthly income plan
·
No
guarantee of regular income
Most of the people have this myth that a
monthly income plan gives regular monthly income, but the reality is that it
doesn’t provide a guaranteed monthly income and this is because of the
volatility of the market. There is also no regulation on the MIP part to
declare regular dividends.
·
Prone to
mis-selling because of high commission
The commission received by the agent for
selling monthly income plan is generally higher than other products and that’s
why they are very much interested in selling an MIP. The high commission of MIP
leads to mis-selling as the agents label Monthly income plan as a “Safe Fund”
or the “Best Product”.
Don’t be in the misconception that Monthly income
plans are fully safe, just because they are debt oriented product. Monthly
income plans can also give negative returns, but that happens only in extreme
cases.
Best Monthly Income
Plans in India
|
Plan
|
Risk
|
Return
|
1 year return
|
|
HDFC
MIP long term
|
Above average
|
High
|
18.20%
|
|
Prudential
ICICI Income multiplier regular
|
High
|
High
|
17.88%
|
|
Birla
MIP II Wealth 25
|
Above average
|
Above average
|
13.68%
|
|
Birla
Asset allocation conservative
|
Above average
|
High
|
14.19%
|
A monthly income plan
gives you a steady income flow by investing huge portion of the portfolio in
debt and a small portion in equity but it comes with some disadvantages also.
It all depends on your need and risk appetite that whether you want to go for a
monthly income plan or not.
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