Monthly Income Plans

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Hybrid Mutual Fund Schemes*

In our first class, when discussing about types of schemes, we said:

There are three types of scheme:

1. Equity schemes

2. Debt schemes

3. Hybrid schemes

A *hybrid fund* is a category of mutual fund

that is characterized by portfolio

that is made up of a mix of stocks and bonds,

which can vary proportionally over time or remain fixed.

A *Hybrid fund* usually has a mix of one of more of equity, debt and gold.

So, by investing in one scheme, we are indirectly investing into many asset classes at the same time.

The fund manager uses his expertise to decide where to invest in, and how much to invest in

Question:

Sir hybrid are like liquid funds or short term ?

Not. Hybrid schemes are not like liquid funds or short term. They are for medium to long term investing

Ohhk

Liquid funds and short term funds are actually types of debt funds. They are used for investing for few days to maximum of 1 year.

Actually, in terms of risk, Hybrid funds fall between the safer Debt funds and risker Equity funds.

Examples of Hybrid funds include:

1. Monthly Income Plan

2. Balanced Funds

3. Capital Protected Schemes etc.

First lets see what *Monthly Income Plans* are.

As the name suggests *Monthly Income Plans* or MIP, would be giving monthly returns.

i.e the scheme announces dividend every month.

This means, profits of the fund are given to investors on a monthly basis.

Remember, what ever may be the security, dividends can be given out of profits only. Not the capital which we invested in.

So, this means, the fund has to make profits every month. Right?

Because the fund manager has to make profits, he invests some part of the fund in debt fund and some part in equity

Debt instruments generally do not give losses.

Because the fund strives to make profits every month, most of the underlying securities of the scheme will be in debt fund.

This is because debt funds are safer instruments and usually carry a fixed rate (interest rate etc) and mature at a fixed time.

The fund manager plans the things so well that some or the other amount is always paid.

This is done by timing the maturity dates so as to coincide around the dates of the dividend announcement

The fund manager retains some profits in the fund so that he can share it next month

In this manner, the fund manager tries to give monthly profits.

The scheme NAV might fall down at times. This does not mean the scheme has made a loss.

There will be several reasons for this.

Like in equity shares, when a dividend is paid, the NAV of the scheme too falls to the extent of the dividend paid.

The dividends will automatically get to your bank account.

And they generally come in 1 or 2 days.

So, they can be perfect instruments for our planning.

For long term growth of the fund, the fund manager might invest a small portion of the fund into equities.

Because we know equities on the long term outperform debt.

So, on the long run, equity allocation will help and feed the monthly dividend.

Remember, Mutual funds, like other securities involve market risks.

There is no guarantee that the fund will perform and there is no guarantee that dividends will always be paid.

They depend on market conditions.

The only asset class where the term *guarantee* can safely be used is insurance.

So, our belief is that the mutual fund scheme performs well and consistently pays us back.

Of course, the fund manager will worry about the asset allocation between equity and debt portions.

Hybrid funds usually have two fund manager - one for equity and the other for debt + gold etc

All we have to see if the performance of the fund over the long term.

Now, who will need this type of fund?

Any one who needs regular flow of money needs this.

For instance,

You could invest in these schemes to meet your monthly expenses such as electricity bill, fuel charges etc.

Retired people could invest in the scheme so that they get a pension-sort of.

You can invest for the sake of your mother who lives long away to meet her up monthly needs etc

Now, lets see how to build this type of fund.

There are two ways of building this type of corpus

The first method is starting slow and then catching up.

I will explain this first.

Assume your monthly need to meet up electricity bill is Rs 2000

But to invest in the scheme and get a dividend of Rs. 2000 right away might not be possible.

Because the returns of the scheme will be at 6% to 12% per year

So we start slow.

We begin with investing in a MIP scheme. Select Direct Option. Dividend Payout Plan.

Assume i have Rs. 5000 idle money to invest for the fund.

Initially, the month-end dividend payout will be a small amount.

May be a mere Rs. 100 or so. just some hypothetical number.

Invest additional money or not, you will be getting around Rs. 100 per month as long as you hold the scheme.

Obviously, Rs 100 will not be sufficient.

When ever you feel like u have some idle funds, keep adding to the scheme.

If you need a disciplined form, consider investing in SIP method.

With every investment you make, the units gets added and your folio will get decent units.

So, gradually, month after month, the dividend payout to your bank account increases.

And some day, the monthly dividend amount would be sufficient to meet your target expenses.

Under present circumstances, dividends in MIPs are paid in the last days of the month.

Dividends are tax free in the hands of the investor. So you need not worry about taxes.

However, being a debt fund, there will be a Dividend Distribution Tax paid by the mutual fund in the background.

So, you need not worry about DDT either.

This method is suitable for those who want to get tax free returns, though with smaller returns but in a safer and almost guaranteed manner.

Understood this method?

Suppose, i invested 1 lac, inthis kind of fund, and return is 8%, then how much i get as dividend?

1 lakh * 8%=8000 per year

approximatly 8000/12 is dividend ryt?

8000/12=Rs 666

okk...got it

Monthly ~650

Also, like equity funds, it is better to SIP in this

If u have 1 lakh, invest, say Rs. 5k per week or so

SIP most often gives more units

Dividends are paid per unit

So the more units u accumulate, the more possibility of the monthly dividend.

Also, monthly dividend % is not fixed. It might go up or down

So, it is safter to keep investing in the scheme till u get 1.5x the target monthly need

apart from dividend, the nav value also increses in fuyture ryt?

Yes. The Equity part of the scheme will aim for growth.

So NAV will keep going up because of the Equity growth

But most MIP schemes will have 80% debt and 20% equity

So they are no way in comparison with pure equity schemes.

As i told u earlier, in terms of risk and return, hybrid schemes fall in between Debt and Equity.

Now, there is an alternative form for this as well.

If you notice, in our first method, the monthly dividend was Rs. 100, then as you kept investing in the scheme, the dividend grows to Rs. 150 and so on.

So, it is a progressive and time taking process.

An alternative to this method is to first invest in a good equity scheme under SIP mode.

Under DIRECT - GROWTH plan

Once a sufficiently large corpus is built, switch that amount to the MIP Scheme and select DIRECT - DIVIDEND PAYOUT

Because equities grow faster, there is a possibility of getting the full Rs. 2000 targeted amount quickly (compared to the first method discussed earlier)

This concludes my topic on MIPs. I will take questions regarding this topic if you have, and then i we will listen to Ankit and try to frame a solution.

Tax free returns!

Initially invested capital is retained

Actually this is how Annuity insurance schemes works

Of course, they give guarantee and rate is fixed for life long.

And the returns there are taxable

If you are an active investor or atleast can make investing decisions, MIPs are better than Annuity

Post offices also offer MIP but their rates are too low and the scheme is for limited period of time only.

Post office MIP are more like reverse of traditional Recurring Deposits.

Also understand, Mutual Fund MIPs are considered investments. Hence no guarantee for returns or capital.

Plz also tell me how to select best MIP sceme...n any if u can suggest..my age 26 n i can invest 15-20k / month

Age is not a criteria for investing in MFs. For Annuity under insurance, it is important.

You can get the list of schemes from https://www.valueresearchonline.com/funds/fundselector/default.asp?cat=25&exc=susp%2Cclose%2C3Star%2C2Star%2C1Star%2CnotRated

My personal choice is to go for any one of the below:

Birla Sun Life Monthly Income Plan II - Savings 5 Plan Franklin India Monthly Income Plan - Direct Plan ICICI Prudential MIP 25 - Direct Plan

Check for consistency of returns

It is better to keep funds under MIP only to the extent of 1.5x your montly needs.

Once ur feel like you are getting sufficient monthly amount, you may stop adding more and invest in other schemes like equity schemes for instance.

ICICI Prudential MIP 25 - Direct Plan, what 25 here?

looking at ICICI Pru MIP 25, the fund invests 70% in debt and 30% in equity

So no coincedence in that either

Application Amount is Rs.5000 (plus in multiples of Rs.1)

Min. Additional Investment is Rs.1000 (plus in multiples of Re.1)

You can make any number of investments in a year

Exit load is a bit complex. It is safe to assume 1% exit load if redeemed within one year of investment

Ideally, first start preparing a monthly expenses list

Determine how much money you need

Sort the amounts to ascending order.

Start investing in MIP and try to reach first expense from the list first.

and so on

So, generally returns should be in the range of 10-12% ryt? Yes. Over the long term, i have seen them ranging from 6% to 15% depending on the scheme

I can understand the return rate is low.

When you compare with other asset classes

But you should understand the safety aspect and the monthly payments they make

i would say this is the first type of investment an investor should make.

If you do not touch the MIP capital invested, it will grow in accordance to the rising prices

You can just invest and forget about meeting monthly expenses for the rest of your life.

When your lifestyle changes, u will have to increase the invstment in the scheme as well

And to be safe, it would be better to invest in two MIP scheme

So that in an unfortuante case, when one scheme does not pay a dividend, the other one comes to the resuce

Also, it is important not to invest more than your monthly needs. Any additional funds could be invested in other high risk high return asset classes such as equity schemes

One friend asked: As we all knw market is high pe now should we book profit on mf ? Or continue sip ?

Mutual funds should not be seen and treated as equity share investments.

The fund manager is the person managing the scheme

So, he know how much and when to book profits.

As an investor, you just have to see if the scheme is performing well or not.

Take mutual funds as passive investments (and not as active as equity shares)

so, i would advise to continue SIPs. Actually, during the market fall, you will be able to acctually get more units for the same amount of money.

So, do not time the market with MFs. Redeem the funds when u actually need money or when your goal is reached.

One friend asked: How to determine that xyz fund will not perform..n we need to exit

1. Compare the scheme returns with the underlying index. You can get this detail from Factsheet available on Mf website

2. Compare the scheme with other similar schemes

3. Check changes in expense ratio of the scheme

4. Check if there is a change in fund manager or the way the fund is managed

5. Always compare scheme returns on a 3 year time frame - not monthly or not even yearly

What is debt

Debt = Loan

So, a debt fund is a scheme which invests in money instruments

Like money market instruments, guilt, bonds, debentures etc

Since debt funds invests in debt securitise, they are consider safer (compared to equities)

A friend asked: When to exit a fund?

Exit a fund if your financial goal is reached.

Say, you invest in mutual funds for retirement and when the retirement time comes, exit it.

Or you may exit if another competing scheme is performing better than this consistently over a period of time, say on a 1 year or 3 year basis

Question: Do not invest more than the desired amount

MIP is a hybrid fund with near to 70 - 80% exposure to debt

And we know debt hardly beats inflationary returns

They are not good wealth management instruments.

So for long term wealth growth, better to invest in equity schemes.

Question:

Do you think its better to go MIP or SWP. As per my knowledge dividends are paid after deducting tax . please correct me if I am wrong

The choice of going for MIP or a Systematic Withdrawl Plan (SWP) depends on how long we need the money to come.

In MIP, we are depending on dividend amount only. So the acutal principal amount is still in tact.

However, the problem with this is that the dividend may or may not be the same every month. Also, the dividend is post-tax which means we are forgoing some part as tax (actually done by the fund house). They are tax free in our hands.

But the advantage with this method is that you can get lifelong dividends. And when you feel the dividend amount is not sufficient, you would make a small lumpsum investment when you have surplus money.

When we select a SWP, it is will be treated as redeeming from our principal (and money that has grown).

The advantage of this method is that you are assured the fixed chosen money every month.

The disadvantage is that your corpus will be getting reduced and after few months or years, all the money would have got redeemed and you wont have any money left in your folio.

Is it possible to automatic transfer of MIP dividend to elss scheme

May be not. Because..

1. ELSS investments should always be in multiples of Rs. 500

2. Dividend are optional and given at the discretion of fund manager. Not always guaranteed. But at the end of the year you should have completed your ELSS which is essential and important.

Monthly Income Plans

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