BOMBAY, 14 January — This week, we take a look at one of the most popular investment tools — Monthly Income Plan, or known as MIPs. This is an instrument which has been around for a very long time, yet, there are many amongst us, infact a majority of them who do not know what this MIPs is all about. So lets see what MIPs is all about. It is even more important to understand MIPs given the present market scenario.
MIPs are basically investment instruments that provide an investor a great deal of security and a steady and secure flow of income. These investment instruments could either be bank deposits, post office monthly income schemes, mutual funds and fixed deposits of corporates.
There was time when a majority of the Indian population stashed away a major part of their savings in banks, which was then considered to be the safest and most reliable investment avenue. Times have slowly been changing; the Indian economy has steady merged with the global economy, thereby bringing down the interest rates in tandem with those in developed economies. Bank deposits are definitely much more safer and reliable then other investment avenues.
However, investors should see to it that the banks with which they are depositing are preferably nationalized banks, as recent debacles have proved the creditworthiness of a various cooperative banks to be otherwise. The rates of return can vary from anywhere between 8 percent to 9 percent.
Then there are a large number of companies in the market with fixed deposit instruments. Reliance is one company that has relied to a great extent on its fixed deposit program to build its empire. However, not all companies will be in a position to stick to their promises, therefore it is highly imperative that individuals invest with companies with reliable track record.
Senior citizens need to note that certain companies such as HDFC and Dewan Housing offer marginally higher interest rates (usually 1 percent). Even before rushing into making investments, an investor should look at the profit and loss account, the balance sheet and dividend history of the company. There is also the Post Office Monthly Income Scheme (POMIS). The scheme is aimed at individuals expecting a steady flow of income every month. Aptly, the scheme is open only to individuals and not to corporates.
Contrary to the impression that the cut in interest rates on post office investment schemes has rendered these unattractive, the post office monthly income scheme currently offers very attractive returns vis-a-vis most comparable fixed income instruments. This has happened because interest rates on comparable debt instruments such as bank fixed deposits, ICICI bonds, etc have also fallen. While POMIS always offered highest safety and freedom from TDS, this improvement in relative returns has turned it into a currently unmatchable combination of these three qualities. And this is the reason for writing about it now.
POMIS is similar to a 6-year fixed deposit yielding interest at the rate of 9.5 percent per annum payable monthly plus a 10 percent maturity bonus.
While fixed deposits with reputed banks currently yield approximately the same or probably a slightly lower interest rate (the more reputed and safer the bank, lower the rate), it is the 10 percent maturity bonus that tilts the balance in favor of the POMIS.
However, there is a caveat — the POMIS investment has to be held for the full period of 6 years for the maturity bonus to be payable and consequently for the POMIS returns to be higher than comparable instruments.
Then comes the Mutual Fund Monthly Income Plan. Earlier, MIPs meant only Unit Trust of India (UTI) but now it is no more the prerogative of the UTI, a number of other private players like Pioneer ITI, Birla Sunlife, Pru ICICI and Reliance. All of these players have joined the fray and have launched MIPs in a big way.
Mutual fund monthly income plans are considered to be most lucrative. They offer the highest levels of liquidity, and its returns are comparable with other investment avenues like bank and company FDs and POMIS. Further, dividend from MIPs is tax free in the hands of the investors in comparison to FDs, which are taxable. However, one of the most significant drawbacks in case of mutual fund MIP is that the returns are not assured as against FDs and POMIS where an investor is assured of a specific rate.
