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Monday, November 22, 2010

Monthly Income Plan - Demystified

Monthly Income Plans
An investment vehicle that aims to provide a regular source of Income. As the name suggests monthly income plans try to give monthly payouts in the form of dividends or interest as the case maybe for investors.

What are the types of Monthly Income Plans available in India
Any organization or institution that strives to give a monthly payout can be grouped under monthly Income plans.
I would like categorize monthly Income plans according to the type of organization that sells them, The type of Payout that the schemes makes and as guaranteed and non guaranteed products.

According to the type of institutions that sells monthly Income Schemes; 
Schemes provided by financial institutions like Mutual funds, banks, Insurance

Schemes provided by Govt Agencies like Post office, NABARD and others quasi government establishments

Schemes provided by others which include chities, trusts (other than mutual funds), gold establishments etc.

According to the type of payout that the fund/scheme makes.

Importance of this is that Interest payouts are taxable where as dividend payouts are Non-taxable… this could affect net receivables in the hand of the investors.

Schemes that make Interest payouts e.g. Post Office Monthly Saving Scheme, Bank FD monthly payout scheme, Insurance Annuity Payouts.  

Schemes that make dividend payout Mutual fund houses

According to the type of schemes that guarantees payout.

            Schemes that guarantee payouts are Post Office Monthly Income Scheme, Bank FD

Schemes that don’t guarantee returns or payout are Mutual funds and all other sundry Monthly Income Plans provided by organizations.

Who are the main players that provide Monthly income facility?

Banks, Insurance companies, Mutual Funds and the Post office are the main institutions involved in selling Monthly Income Plans.

What are the advantages and disadvantage of various monthly income plans provided by these organizations?     
Particulars
Banks
Insurance Co’s
Mutual Fund Houses
Post Office Monthly Income Scheme
Rate of return
6.3%
7.1% currently but market determined

8%
Limit
Any amount
Any amount
Any amount
3,00,000
Guarantee
Yes
No
No
Yes
Lock-In
Yes
5-20 years
No lock in
6 year lock in

Is there any age limit for entering these schemes?

Insurance companies now days does not solely sell annuity plans they combine it with their retirement plans and hence can have age restriction, all other MIP’s have no age limit and anybody can apply to them.

Can I withdraw my funds as and when required?

Insurance companies and post office will have lock-in period of minimum 6 years, depending upon the product banks can have a lock-in period. Mutual Fund MIP’s technically do not have any lock-in period but on exit before 1 year they can charge you an exit fee of 1%.

Is Mutual Fund Monthly Income Plan safe.

They are not guaranteed products but then they are structured in such a way so as to ensure safety of capital. In the last 10 years (44 Quarters analyzed) there has been only 4 quarters were a Mutual Fund MIP has shown a loss; Quarter ending June 2004, Sep 2006, June 2008, Sept 2008. The maximum loss shown during the quarter was 6%.

How does a Mutual Fund Monthly Income Plan function?    
The Scheme holds 75%-95% of its funds in debt securities like G-secs, Bank CD’s, Corporate Deposits and the like. This ensures steady flow of interest payouts as well as capital safety. The balance 5%-25% of the funds are held in stocks and this portion gives capital appreciation. Since most of the funds in a MIP are invested in debt securities the fund is far less volatile than the stock markets.

How has the returns of Mutual Fund MIP’s been over last couple of years?
Over the last 10 years there has been only 4-5 quarters depending upon the scheme that has given negative returns. Out of the 44 Quarters analyzed the highest return earned in any quarter has been 15% and the lowest return earned has been -7%. The average return over the last 44 quarters has been around 2.67% per quarter. On an annual basis there has been only 1 year where a Mutual Fund MIP has delivered negative returns year 2008, when the stock markets fell by more than 70%. The lowest return was -15% for the year ended December 2008. The highest return received in any given year has been 37% (Year ending Dec 2009). The average return over the last 10 years has been 11.3%.
Scheme
Annualised Returns Back Dated from 20 Nov 2010
3 Months
6 Months
1 Year
2 Year
3 Year
5 Year
Birla Sun Life MIP
7.3
9.5
7.8
16.0
6.7
8.7
Birla Sun Life MIP - Savings 5
6.3
6.7
5.6
9.7
11.6
9.9
Birla Sun Life MIP - Wealth 25
7.6
11.6
8.3
20.5
5.8
8.6
Birla Sun Life Monthly Income
7.8
9.2
7.8
17.4
8.4
10.2
Canara Robeco MIP
7.4
9.4
10.3
19.5
7.6
12.9
FT India MIP - Plan A
5.0
5.9
6.2
14.5
5.0
8.3
FT India MIP - Plan B
5.0
5.9
6.2
14.5
5.0
8.3
HDFC MIP - LTP
10.7
14.3
11.2
25.3
10.6
12.5
HDFC MIP - STP
7.1
8.5
7.3
15.1
7.0
7.3
ICICI Prudential MIP
9.5
9.2
6.9
15.4
6.8
8.9
ICICI Prudential MIP 25
11.0
11.6
8.7
20.5
6.4
9.7
LIC MIP - Cumulative
5.9
6.8
5.6
12.8
5.3
9.2
SBI Magnum MIP
6.8
8.4
8.0
8.9
3.6
5.7
Sundaram MIP - Moderate
5.8
7.2
6.0
9.0
3.8
6.1
Tata Monthly Income Fund
3.7
4.1
3.3
9.2
5.6
6.4

Average
7.0
8.6
7.3
15.2
6.6
8.8
Maximum
11.0
14.3
11.2
25.3
11.6
12.9
Minimum
3.7
4.1
3.3
8.9
3.6
5.7
This is just a list of top MIP’s in the country…the list does not give indication towards recommended schemes.      

What kind of investors can invest into an MIP, or who is this product suitable for?
The product is suitable for anyone who expects a regular income, the product is better than a Bank FD in term of returns as well as capital appreciation. But then the product should not be the only source of income expectation. Diversification is key for a person who has not planned his retirement income then he can invest into mutual fund MIP’s and Post Office Monthly Savings Scheme.

TAXATION of Monthly Income Plans
Any type of interest payout will be taxed according to your tax bracket, just like an Interest bearing FD. If you fall under the 30% Tax slab then all your interest payouts including that of Post Office will have to pay 30% Tax. For Mutual Fund Investments MIP's are classified as Debt schemes. Mutual Fund MIP's make dividend Payouts and hence there is TDS of 14.162%, irrespective of the amount of investment or your tax bracket. Mutual funds are much better tax efficient products. 

What are the risk factors in Investing in a Mutual Fund MIP? Or in other sense what is my maximum loss?
Your maximum loss will be restricted to the equity component in your MIP. Assuming you own Birla Sunlife MIP, the total corpus of the fund is Rs 100. Out of this fund the 80% is invested in Government Securities yielding 7.5% annual returns and the rest of the 20% is invested in Stocks. Assume at the end of the year the stock market falls by 50%, then the Rs 20 investment goes down to Rs 10. The total value now becomes Rs 80 in debt + Rs 10 in stocks which is Rs.90. The Rs 80 invested in Government security will give 7.5% return at the end of the year which is 80*7.5/100 = Rs 6. So the net total at the end of the year is Rs.96. the total loss at the end of 1 year is after a 50% fall in the markets is 4%. So the loss on the product is restricted to the equity exposure of the product. Loss can also happen in another way assuming the fund bought some government securities paper and LNT Infrastructure bonds. After 1 year if the company LNT goes bankrupt then also you can have some potential loss. But then the mutual fund companies will buy bonds only from AAA rated companies towards that extent loss can be very minimal.  

 What is your top recommended Monthly Income Plans?
Scheme Name
Launch Date
Corpus (in Crs)
Expense Ratio
Fund Manager
Birla Sun Life MIP - Savings 5
01-May-04
1358.1793 (29-Oct-10)
1.3800 (30-Sep-10)
Satyabrata Mohanty,Nishit Dholakia
HDFC MIP - LTP
26-Dec-03
9725.4509 (31-Oct-10)
1.4500 (30-Sep-10)
Prashant Jain,Shobhit Mehrotra
ICICI Prudential MIP 25
30-Mar-04
762.2404 (29-Oct-10)
1.8700 (31-Oct-10)
Mrinal Singh,Rajat Chandak

Scheme Name
1 Year
2 Years
Birla Sun Life MIP - Savings 5
5.41
10.19
HDFC MIP - LTP
11.05
29.01
ICICI Prudential MIP 25
8.14
23.12

TOP 10 Holdings
Birla Sun Life MIP - Savings 5
HDFC MIP - LTP
ICICI Prudential MIP 25
Company Name
% of Net Asset
Company Name
% of Net Asset
Company Name
% of Net Asset
Cash
12.7642
Cash
12.0524
Corporation Bank
15.3927
Bank of Baroda
11.3584
GOI
10.5845
GOI
12.0342
HDFC Bank Ltd.
9.0408
Tata Motors Ltd.
3.9723
Canara Bank Ltd.
10.2385
LIC Housing Finance Ltd.
7.7961
HDFC.
3.1996
Sundaram Finance Ltd.
4.9074
GOI
7.7181
LIC Housing Finance Ltd.
3.0592
Small Industries Development Bank
4.8718
NABARD
7.5553
Shriram Transport Finance Co. Ltd.
3.0249
Kotak Mahindra Primus
3.9787
Indian Bank
7.5493
Bank of India
2.9568
HDFC
3.6578
National Housing Bank
7.3253
State Bank of India
2.7509
SREI Equipment Finance Pvt  Ltd
3.1074
Power Finance Corporation
4.4759
State Bank Of Bikaner & Jaipur
2.3577
Bank of India
3.1039
Federal Bank Ltd.
3.9220
HPCL
2.2128
LIC Housing Finance Ltd.
3.0583


1 comment:

  1. Confused Investor22 December, 2010

    Hey i am confused with the holding pattern of these MIp's. some of them talk about 10% into the equity market others talk about 20%.

    Some of them say that it is best to stick to short duration bonds for liquidity and Dividends while others talk about long duration bonds of Gsec's pls advice on the kind of plans and the type i should invest..

    ReplyDelete