Understanding Monthly Income Plan of mutual funds

Mutual Funds | admin | June 28, 2011 at 8:58 am

Monthly income plans launched by mutual fund houses can be a good solution for the income needs of individuals . These are open-ended schemes that invest a majority of their assets in fixed income instruments with a small allocation to equity and equity-related instruments . Generally, the equity allocation is capped between 5% and 25% of the total assets . Put simply, higher the allocation to equity, higher the expected returns. These funds aim at generating regular income for investors.

The schemes offer various options, such as monthly and quarterly income to satisfy your income needs. Neither the frequency nor the volume of the dividend is guaranteed. The investments made by these schemes are subject to market movements and, at times, when the markets plunge, the fund manager may choose to skip the monthly dividend. As the scheme aims at generating regular income, the fixed-income portfolio is constructed focusing on accruals and there will not be much interest-rate risk. This ensures that in a rising interest rate scenario, the fund does not lose much.

The equity component of the portfolio is also built in a rather conservative manner and typically includes blue-chip stocks with established track record. This makes these funds good option for conservative investors to invest in equities for the longterm . Such investors can choose to invest in the growth option of monthly income plans. For investors keen on a fixed monthly income , growth option works well if the investor signs up for the systematic withdrawal plan, where each month, units of a pre-determined value are redeemed and the investor is paid.

As the equity exposure of these schemes is small, they are taxed like a debt mutual fund. Dividends announced by these funds are taxed at 13.52%. The long-term capital gains are taxed at a lower rate of 10.3% without indexation , or 20.6% with indexation , whichever is lower.

Source: Economic Times