Fade-up with high volatility in share market? Looking for safe source to invest some money to earn steady monthly income? If yes, than while searching for the most appropriate investment avenue you must have come up with Monthly Income Plans of Mutual Funds as you answer. But before investing in Monthly Income Schemes of Mutual Funds, you should know the pitfalls and limitations of these plans.

What is Monthly Income Plans of Mutual Funds?

Monthly Income Plans offered by Mutual Fund Houses are nothing but a debt oriented mutual fund schemes which give you income in form of dividends. MIPs invest about 70% to 80% in debt instruments such as government securities, corporate bonds, money market instruments and debentures and remaining 20% to 30% in equities and cash. The income you get in form of dividends can be taken out in various intervals such as monthly, quarterly, half-yearly or yearly. Similar to every other mutual fund scheme MIPs too come in two variants.

1. MIP with Dividend Option:

Under MIP Dividend Option you will be given an income in form dividend at regular interval, if any. You can choose the intervals in which you wish to receive dividend i.e. monthly, quarterly, half-yearly or yearly. Please note the dividend received by you is tax-free but AMC paying out the dividend is required to pay the DDT @ 15% with cess and surcharge also which eventually reduces your dividend in the first place.

2. MIP with Growth Option:

Under MIP Growth Option no money is paid out you. The profits earned from the invested amount will keep growing and you will get accumulated amount with all the profits only at the time of redeeming the mutual fund units. The benefit you reap in growth option is higher than dividend option because the compounding works wonders for longer terms but your profits may get reduced due to taxation. (Discuss later in the article).

Pitfalls of Monthly Income Plans of Mutual Funds

You must have got the basic understanding of both the options of Monthly Income Plans of Mutual Funds. But there are few limitations or say myth which you should know before parking your money into MIPs. Below points are solely regarding Monthly Income Plans i.e. MIP with Dividend Option.

No Guaranteed Regular Income/Dividend

First of all, you cannot expect to get regular income aka dividend. Since MIPs invests in debt as well as equities, the certainty of profits are not sure. On top of it, regulation guiding Mutual Funds clearly states that dividend can only be paid only from the surplus/profits and not from the capital. For example, if the NAV of MIP increases from Rs.10 to Rs.13, than fund can declare dividends only out of the surplus of Rs.3. Hence, if the fund's NAV decreases due to market swings or rate reductions, there may not be any dividends.

Track records of the existing 26 Monthly Income Plans also shows that for the last five year (since September 2010) only half of them were able to pay regular dividends. This means the chances of receiving regular dividends is just 50%. In short it can be said you cannot only rely on MIPs for your basic living expenses.