Ramesh Mehta has lost his job because of recession. He has invested in stocks, PPF, and mutual funds. He doesn?t wish to sell them at a loss as values have gone down. However, he needs some income every month to survive.
Consider another example. Annan Jain has old parents residing in Mumbai. He sends them money every month but he is afraid that he may miss sometime because of unforeseen circumstances. He also doesn?t want to keep money in current or saving account because of low returns. Both Ramesh and Annan can benefit from a plan which can generate monthly income.
Monthly income plan
A monthly income plan is a scheme which delivers returns every month. The investors can invest, depending on type of scheme, a lump sum amount or in a staggered manner by a systematic investment plan. Usually the returns are in the range of 6%-12% depending on type of the scheme and market level.
Available options
Monthly investment plan has the following options available:
* Post Office Monthly Income Scheme (MIS): Post office monthly income schemes pay assured monthly income. It provides 8% of annual interest with a lock-in-period of 6 years. At the end of maturity, you get additional 5% bonus. The effective rate of returns works out to be 8.84%. The account can be opened in post offices across the country. The limit is Rs 4.5 lakh for an individual account and Rs 9 lakh for a joint account. The minimum amount required to be deposited is Rs 1,500. Investors can deposit the amount only once. This is a pure monthly plan where you have to receive the interest every month.
The advantage of post office MIS is that it is backed by the government of India and hence is a very safe investment. Income tax benefit is also available under 80C with the limitation of Rs 1 lakh. The drawback of post office plan is the lock-in period of six years. Even though there is option to close it before the lock-in time, you have to pay penalty. Closing before 3 years entails a penalty of 2% and after 3 years 1%.
* Bank Deposits: Some banks have monthly plans on fixed deposit. Recently, Bank of Baroda has come up with a fixed deposit plan that pays its depositors regular monthly income. You can deposit a minimum of Rs 1,000 for minimum of 1 year to maximum of 10 years. The interests vary as per the tenure of deposit. The advantage of bank deposits scheme is that it is largely risk free. The drawback is its low rate of return.
* Mutual Funds: These schemes are usually called MIP (Monthly Income Plan) mutual funds. Mutual funds give higher returns compared to post office MIS and bank fixed deposits but the risk is also high. The plan usually pays between 10% – 12% returns in the long run. MIP funds are generally conservative in nature with 70%-90% invested in interest yielding bonds such as government securities, commercial papers, and certificates of deposits and rest 10%- 30% in market-linked equity. Investors should invest in MIP for medium to long terms to average the market volatility and get higher returns. MIP funds are ideal for investors who are looking for higher returns and liquid investment. The investors can come out anytime by liquidating the fund. Additionally, MIP plans are flexible and mutual fund managers juggle their portfolio to take the advantage of the market situation & interest rates.
The other advantage of MIP funds is its conservative approach to investment. It plays a stabilising role in your portfolio. The drawback of MIP mutual funds is the volatility of returns despite being named monthly income plan. MIP mutual funds don?t have any obligation to pay monthly income.
* Performance and projection: The year 2008-2009 has been little bad for the market and economy and hence, for MIPs. However, performance of MIP in 2009-2010 has been good. Moreover, because of excellent performance of the market, MIP mutual funds invested larger portion in equities.
In the year 2011, the RBI may increase the interest rate which will impact bond prices negatively. However, the economy is slated to grow at 9%-10% and this will give boost to the equity portion of MIP levelling the returns to a reasonable rate.
