Tuesday, June 5, 2012

Why monthly income plans are better than post office monthly income scheme

Monthly income plans (MIPs) from mutual funds are in the spotlight for the wrong reason. This hybrid category of mutual fund schemes has offered only 5.93% in the last one year. Compare this with the 8.5% returns offered by post office monthly income scheme(POMIS). 

For the uninitiated, MIPs from mutual fund schemes try to beat debt investments, like POMIS, by investing a small part of the corpus (5-25%) in equities. 
The logic is that you will get the interest from debt investment, plus an additional boost to your returns from equities. Clearly, the formula has not worked forMIP investors this year - probably due to a depressed stock market. 

"Over the last one year, interest rates were rising and equity markets were falling which resulted in MIPs not living up to the expectations of the investors," says A Balasubramanian, chief executive officer, Birla SunlifeAMC. 

That calls for the big question, probably faced by most MIP investors: should one dump MIPs and move toPOMIS for superior and guaranteed returns? 

First, you have to understand the nature of returns offered by these two products. MIPs though aim to pay each month, they do not guarantee the same; also, the amount of payout is not guaranteed. POMIS, on the other hand, offers guaranteed 8.5% to investors. But POMIS comes with a five-year term. 

"It all depends on your needs. If you are keen on regular guaranteed income, POMIS is the solution for you. But if you want to participate in upside in equity markets along with regular returns, look at an MIP from a reputed fund house," says Anup Bhaiya, managing director, Money Honey Financial Services. 

Be forewarned though: the upside of equities looks a big distant at this point of time. 

Historical returns 

Sure, MIPs have posted poor performance last year. But you should not forget the stellar numbers these schemes posted in 2009. MIPs offered by fund houses such as Birla Sunlife, HDFC, Franklin Templeton gave more than 15% returns in just one year riding on equities. 

It was the low base in equities in CY2008 that worked for these schemes then. Equity markets are experiencing a similar situation now. 

"Interest rates are high now and equities are quoting at attractive valuations. MIPs can be a good vehicle to buy equities at cheap prices while enjoying high accruals from fixed income instruments," says A Balasubramanian. 

Liquidity and other issues 

You have to account for liquidity along with returns while choosing your option. POMIS allows premature withdrawal subject to a deduction of 2% of the amount invested if such a withdrawal happens within three years of investment. 

If you choose to withdraw after three years but before maturity, you stand to lose 1%. Most MIPs charge 1% exit load if you decide to redeem units within one year of allotment. 

Another issue is you can invest only 4.5 lakh in one account in POMIS, or 9 lakh if you are investing in a joint account. There is no such limit on investments in MIPs. 

They also enjoy better tax regime. The monthly payouts by MIPs are treated as dividends from debt funds and attract dividend distribution tax of 13.52%. 

The interest income from POMIS is added to your taxable income and taxed at the marginal rate of tax, which for people in the highest bracket works out at 30.9%. 

Where to invest 

Even if you are looking for guaranteed returns, you don't have to limit yourself to POMIS. "There are many banks and financial institutions, such as HDFC, which offer better interest rates, with almost no default risk," points out Ajay Kinjawadekar, CEO, Moneysafe Financial Services. 

HDFC, the housing finance company, offers 8.9% for 47-60 month tenure for individuals and 9.15% for senior citizens under its regular monthly income plan. Under Platinum Monthly Income Plans, HDFC offers 9.4% and 9.65% to individuals and senior citizens, respectively, for 33-month time period. 

"Be it POMIS or some other assured return monthly income scheme from any entity, you have to understand that these schemes cannot beat inflation in the long term. The biggest advantage of an MIP is small allocation to equities, which can help you beat inflation," says a wealth manager. 

Over a five-year timeframe, two MIPs - from Reliance AMC and Birla Sunlife AMC - have delivered returns more than 10% and there are three MIPs - from Canara Robeco, HDFC and Reliance AMC - that offered such returns over seven years. 

"If you are comfortable with some amount of volatility in your monthly income, invest money in MIPs with a long-term track record," says Anup Bhaiya.
Source : ET

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