Monthly Income Plan – Get a Monthly Income in India
Monthly Income Plan (MIP):
A Monthly Income Plan (MIP) in mutual funds refers to investment schemes aimed at generating regular income. Though mutual fund MIPs no longer exist as a distinct category under SEBI’s reclassification, the concept persists through Conservative Hybrid Funds and Systematic Withdrawal Plans (SWP).
These are ideal for investors seeking stable returns with controlled exposure to equities. It has also delivered better tax-adjusted returns in the short to medium term as compared to traditional investment vehicles such as FDs and RD’s. Here are the top ways to earn monthly income using mutual funds in India in 2024
1. Monthly Income Using SWP
A Systematic Withdrawal Plan (SWP) is a method for withdrawing money from a mutual fund on a regular basis, such as monthly, quarterly, or annually. It can help investors generate a steady income to pay for expenses, manage living costs, or replace a regular paycheck.
The SWP allows you to withdraw a specific sum of money from a Mutual Fund scheme at regular intervals. For instance, if you want to withdraw Rs. 10,000 a month on the 1st day of every month, it can be done using SWP. The interval can be monthly, quarterly, or half-yearly, depending on whatever suits right for you. Similarly, the amount you want to withdraw can also vary as per your need. Through SWP, you can also choose to just withdraw the gains on your investment, keeping your invested capital intact.
Once you select the amount of money and frequency of withdrawal, units from your Mutual Fund scheme are sold on the date decided by you. And the transaction to transfer the money to your bank account is initiated.
To generate this cash flow, the SWP Plan redeems units from your mutual fund scheme at the interval chosen by you. The SWP can continue as long as there are balance units in the scheme.
Let us understand this with an example.
Suppose you invest a lump sum of Rs 10 lakh in a mutual fund scheme. The purchase NAV is Rs 100. Therefore, you got 10,000 units. Let us assume you started a monthly SWP of Rs 10,000 after one year from the investment date.
In the 1st month of SWP, let us assume the scheme NAV was Rs 110. In order to generate Rs 10,000, the AMC redeems 90.1 units (Rs 10,000 / 110 NAV), therefore, the balance units will now be 9,909.9 (10,000 minus 90.1 units). The value of your investments in that fund stands at Rs 10.90 lakh (9,909.9 units x Rs 110 NAV) against the initial investment value of Rs 10 lakh.
| Details | Expense |
|---|---|
| Initial Investment | Rs. 10 lakhs |
| Purchase NAV | Rs. 100 |
| Units Purchased | 10,000 (Rs. 10 lakh / Rs. 100) |
| NAV During 1st month of SWP | Rs. 110 |
| Units Redeemed to Pay Rs. 10,000 through SWP | 90.1 units (Rs. 10,000/ 110) |
| Balance Units | 9909.9 units (10,000 minus 90.1) |
| Value of your investments in that fund | Rs. 10.9 lakh (9,909.9 units* Rs. 110 per unit) |
| NAV During 2nd month of SWP | Rs. 112 |
| Units Redeemed To Pay Rs. 10,000 through SWP | 89.29 units (Rs. 10,000/ 112) |
| Balance Units | 9,820.61 units |
| Value of your investments in that fund | Rs. 10.99 lakh (9,820.61 units* Rs. 112 per unit) |
| NAV During 3rd month of SWP | 108 |
| Units Redeemed To Pay Rs. 10,000 through SWP | 92.6 units (10,000/108) |
| Balance Units | 9728.01 |
| Value of your investments in that fund | 10.5 lakhs (9,728.01 units* Rs. 108 per unit) |
As seen in the above example, unit balance reduces overtime in the SWP plan. Still, if the scheme NAV appreciates at a percentage higher than the withdrawal rate, the investment value appreciates.
However, when the scheme NAV fell instead of rising in the third month, then the effect on your investment value was the opposite. Your investment return value was reduced to Rs. 10.5 lakh as against your original investment of Rs. 10 lakhs. This is because withdrawals in scenarios where NAV is falling require more units to be redeemed.
Nevertheless, even if there is a fall in the NAV of the mutual fund scheme, the SWP will continue to provide you regular income till the end of the SWP period chosen by you, or till the time there is money in your invested scheme.
This is why if you rely on mutual funds for regular income, it is better to opt for the SWP option. Unlike IDCW payouts which are not guaranteed and only happen if the scheme manages to make capital gains, an SWP doesn’t have any such restrictions on their withdrawal policies. Irrespective of a mutual fund scheme’s market performance, you can get your monthly (or any periodic) withdrawal amount. This may be a better option over IDCW, where the fund manager decides when to roll out IDCW to the investors.
2. Advantages of SWP In Earning Monthly Income Through Mutual Funds
- It is a facility to redeem units regularly
- You can choose the frequency of withdrawals
- You can either withdraw a fixed amount or only the capital appreciation
- It is ideal for investors seeking regular income from their investments
- there is no tax deducted at source. However, capital gains tax will be applicable as per the type of the scheme and the amount of withdrawal
3. Best Mutual Funds to Earn Monthly Income
When you are looking for a regular income from your investments, the last thing you want is to get adversely affected by volatility. Therefore, it is better to invest in mutual fund schemes that beat inflation steadily while witnessing low volatility in the short term.
Keeping this in mind, you can invest in Conservative Hybrid Funds that invest at least 75% of your money in FD-like instruments to generate consistent income. And allocate a maximum of 25% to stocks that add growth to the portfolio.
Debt Fund categories such as Short Duration Debt Funds, Corporate Bond Funds or Banking, and PSU Debt Funds can also be good choices, as they beat inflation steadily while witnessing low volatility in the short term.
You can also opt for Equity Savings Funds that invest at least 65% of your money in stocks, but they use the mispricing of stocks in different markets to generate returns with less volatility than Equity Funds.
4. Monthly Income You Can Earn Using Mutual Funds
When you opt for the SWP, you can withdraw as much as you want to pay your expenses. There is no upper limit on the amount you can withdraw. Nevertheless, you have to keep in mind the total corpus you have in the scheme and how long it can last.
For instance, say you have Rs. 50 lakhs in a mutual fund scheme that offers a 7% average annual return. In this case, if you opt for a monthly SWP of Rs. 50,000 then it will last for slightly more than 12 years. But if you reduced the SWP amount to Rs. 40,000 then it will last for more than 18 years.
5. Who should Look to Earn Monthly Income Using Mutual Funds
There are many retirees who need regular cash flow for meeting regular expenses. SWP becomes highly convenient and useful for these investors to earn regular income.
Moreover, if you need a source of additional income to tide over the rising living cost, you can opt for SWP as well.
6. Key Takeaways
- Mutual Funds can be useful if you need regular cash flow to meet regular expenses.
- You can earn a monthly income from mutual funds either by investing in the Dividend Option of a mutual fund scheme or by opting for an SWP in a mutual fund scheme.
- SWP is a better option to seek regular income as it is more tax-efficient and guarantees you a certain amount at the end of the month.
- In an SWP plan, you have the flexibility to choose the amount, frequency, and date as per your needs. You can also stop the SWP whenever you want.
Conclusion
A monthly income plan (MIP) is a type of mutual fund investment strategy designed to generate regular income for investors, that mainly invests in debt and equity securities with a mandate of getting cash flows and preserving capital. These plans primarily invest in debt instruments (like government bonds and corporate securities) and a small portion in equities (typically 10-15%) to generate higher returns.
