Wednesday, May 11, 2011

Post office or MF? Let risk appetite decide monthly income option :

he post office's monthly income scheme (PO MIS) and the monthly income plans (MIPs) sponsored by mutual funds both offer monthly returns. But which one is better? The government-sponsored PO MIS gives an assured return of 8% payable monthly plus a maturity bonus of 5%, while MIPs offer better liquidity and also returns by deploying 5% to 25% of total assets in equity and the rest in debt products.


Monthly income plans (MIPs) are hybrid mutual that invest about 80% to 100% in debt and the rest in equity. The returns are not guaranteed. The returns of the monthly income scheme, on the other hand, are guaranteed by the government of India.


MIS assures a return of 8%, plus a maturity bonus of 5% after a tenure of six years. The post office website claims that if the monthly interest payments are invested simultaneously in the post office-sponsored recurring deposit scheme (it earns an interest of 7.5% compounded quarterly), the effective yield comes to 10.5%. However, a closure scrutiny suggests this is a marketing gimmick; the effective return on maturity proceeds, inclusive of the bonus amount, turns out to be 8.77% . Also, the interest income is taxable at the hands of investors. So, the yield reduces further. Let us suppose you invested . 1,20,000 in MIS where the monthly interest components of . 800 are invested in the recurring deposit (RD) scheme, which returns 7.5%, compounded quarterly. So, the RD's maturity amount comes to about . 72,806. This, along with the bonus amount of . 6,000 (5% of . 1,20,000), plus the principal component (a total sum of . 1,98,806), gives an effective yield of 8.77%. The MIP also resorts to a marketing gimmick. A monthly income plan would suggest that the schemes offer some returns every month. However, the monthly dividends from such schemes are not guaranteed. Dividends are subject to the availability of distributable surplus and it is solely at the discretion of the fund house. So, if the market goes through volatile times or nosedives for a long period , no dividend may be declared. As MIPs invest 15-20 % in equities, they are subject to market risks. Nonetheless, a good fund manager manages the MIP in an effective manner and takes calculated risks to give steady returns.


Inflation has been a demon, continuously eating into our returns. Hence, all investors look for a product that generates alpha over the inflation rate. In the current burgeoning inflation rate scenario , returns do matter. If it comes at alittle additional risk, so be it. Senior citizens or persons looking for a fixed monthly return can consider investing in steady performing MIPs with a good track record of doling out monthly tax-free dividends. Ideally, investors looking at monthly payout MIPs for a longer period should invest at ex-dividend NAV on any particular month so that they get more units. As a result, the monthly payouts, ie, monthly dividend yields they get would be high. If monthly dividends are not required, an investor can choose the growth option.


The monthly dividends from MIPs are subject to a dividend distribution tax of 13.84% for individuals ; however, if you sell the units within a year, the gain, if any, would be subject to your personal income tax slab. If you sell units after a year, a 10% long-term capital gain tax or 20% with indexation would be levied. The interest income on PO's MIS would be subject to your personal income tax slab; so, the 8% fixed return no longer applies here.


If you are seeking returns higher than the traditional products like MIS, then MIP is worth considering. One should invest in MIPs with a minimum investment horizon of 2-3 years. Also, you should not bank upon MIPs for monthly dividends, but you can rest assured of steady returns. However, if you are a conservative investor seeking monthly payouts without taking any market-related risks, then you should stick to post office's MIS

Source : ET

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