Monthly Income Plan - How They Work

A Monthly Income plan or MIP can best be described as a debt oriented mutual fund which gives you income,  in the form of dividends. 

They are debt oriented funds that invest in debt instruments like debentures , corporate bonds, government securities etc. 

It has most of its money in debt and rest in equity and cash and you can decide how you want to receive income quarterly, half-yearly or annually. 

MIPs can be viewed as a financial instrument that assure some income to their unit holders every month without much risk.

Many of these schemes not only declare dividend at regular intervals, even the dividend amount declared varies accordingly.

Most MIPs offer a growth option too which make them more of the exception than the rule when compared to other investment options.

This means that unit holders are exposed to NAV related risk with their primary objective of earning a monthly income according to prevailing market conditions.

The fluctuations in the equity market are more than that in the debt market, a smaller proportion of equities may serve as a measure of capital protection. 

They have an advantage on the tax compared to other fixed income options, as unlike interest income which is taxed according to the income tax slab, the dividend distribution tax  levied is lower than the income tax slab of most investors and long term capital gains too are charged at a concessional rate

The disruption of your regular source of income due to any mishap can lead to disastrous situations 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 and most 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,

You  need to remember 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.

A monthly income plan can make a difference as it is an investment gives you an alternate source of income for you and your loved ones.

Government regulations demand that dividend can be paid only from surpluses and not from the capital investment. 

This means that the dividends can be declared from earned income only and not from the initial capital value . 

This makes sure that they can not show to the world that they are constantly giving income in case they have not done well.

While the aim of MIPS is to regularly declare dividends, it might happen at times, that they do not declare any dividends because of bad performance. 

There is no regulation on the MIP’s part to declare regular dividends so if you don’t get your income once in a while just because it’s a debt oriented product, It does not mean that they are reliable.

Even MIPs can give negative return, but in extreme cases and the debt portion is influenced by interest rates. 

When the interest rate falls, the NAV rises as price of bond increases and when interest rate rises, NAV falls. 

At such times the equity portion of the fund helps to maintain the return, interest Rates and how they affect Mutual funds .

MIPs offer lucrative commissions to agents in Equity funds and due to this it becomes easy to sell MIP’s as they can be labelled as the best investment option that is available in the market today.

Recurring Deposit - Why Invest?

Recurring Deposit can be described as an investment that is risk averse and gives guaranteed returns especially if you have short term investment goals.

It is suitable for short term goals that involve a time span of 1 to 3 years and it is the right financial product if you are planning to tackle short term situations that require immediate financial assistance.

They are also a financial product where one can not only invest but at the same time generate a regular monthly income.

 It is similar to other forms of investment with the only difference being that here we invest small amounts every month in a very systematic way.

The amounts are like fixed deposits in that they are taxable, which does not make them a very attractive investment option for tax purposes.

You can invest in them if you want to save for regular purposes, but for tax purposes this is not a good investment.

One needs to compare the interest rates before you invest, as these have undergone a lot of changes in recent times.

 Interest rates on recurring deposits are fully taxable though it still considered one of the best and the safest forms of investment in India.

You will be required to deposit a fixed amount every month for a select tenure and the amount will earn interest.

The effectiveness of the investing in such schemes depends on its features and ability to meet the investors objectives and financial goals.

Recurring Deposit can be viewed as a better investment as it does not involve market risk and you are assured a guaranteed return on investment.

The interest Rates offered by banks for recurring deposits depending on the principal amount and tenure of the deposit.

You will find most banks offering these products through Net Banking and investors can make a deposit online without any hassles.

Flexible recurring deposit schemes allow deposits of any amount at any time and one can make a deposit a small amount every month and one does not need to invest a lump sum to start a recurring deposit.

Interest Rates are low when compared to other forms of investment and customers get an interest rate that varies for Recurring deposits.

Recurring deposits give guaranteed but low returns when compared to other popular investment schemes like Mutual Funds and SIPs.

In case of withdrawals from a recurring deposit account before the end of tenure there is a penalty and instant withdrawals may not be possible in case of a financial emergency.

In case the RD is not flexible, the customer will not be able to change the monthly investment amount.

The customer can deposit money in a recurring deposit account, close the account, update information, view transactions, deposit details and do much more online. 

It is about making an investment and earning interest without even having to leave your home while investing in a recurring deposit.

Interest rates depend on the tenure and deposit amount and in most cases, the recurring deposit interest rate is very similar to that of fixed deposits.

 Interest rates vary  depending on the bank and the plan chosen by the customer. 

Also, many banks offer higher interest rates for senior citizens and can also use a RD calculator to find how much interest you will accumulate for the deposit amount, interest rate and tenure.

If you are a salaried employee you can set aside a particular amount every month as savings and for this recurring deposit is the best option. 

Also, RD schemes come with guaranteed returns and the rate of interest for RD is locked in which will protect the investor from changes in the interest rate.

Some banks offer flexible Recurring Deposit schemes where the investor will not be penalized if the amount is not deposited during a particular month. 

Also, in a flexible RD scheme, you will be able to withdraw the amount from your RD account anytime you want

When you deposit the money in an RD, you will never have the privilege to withdraw any part of the money until the term of the deposit is over. 

Hence, if you are looking for an easy liquidity instrument, recurring deposits are not a good alternative but if you want to discipline your savings then this disadvantage may work to your benefit.

It must be noted that he interest rate that you earn on recurring deposit is much lower that regular fixed deposit schemes, since your deposits are being made in small installments and not as a lump sum amount.

It is not possible in the case of recurring deposits to be able to change your deposit amount, regardless of your financial situation at the moment. 

When you have a fixed amount for investment each month, then the chances of extra or less funds for the deposit should be discouraged from opting for this product.