What Is a Monthly Income Plan (MIP)?

Monthly Income Plans Explained in 4 Minutes or Less

Senior couple looking at paperwork at home
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Monthly income plans (MIPs) are a type of mutual fund strategy invested primarily in debt and equity securities. MIPs are designed to supplement the income of senior citizens who may not have sufficient means to support themselves otherwise.

MIPs are constructed in a very specific manner and operate under defined rules. Learn about the makeup of a typical MIP, the rules governing MIPs, and where MIPs are popular.

Definition and Example of Monthly Income Plans

Senior citizens or retired individuals who do not have substantial sources of monthly income may choose to invest in a monthly income plan (MIP). MIPs are mutual fund plans designed to produce cash flow and preserve capital with the goal of providing a steady income stream to investors. MIPs are invested primarily in debt and equity securities and generate income in the form of interest payments and dividends.

  • Alternate name: debt-oriented mutual fund

How Does an MIP Work?

Monthly income plans are conservative strategies designed to preserve capital and deliver regular income to investors. MIPs are more popular in India than they are in the U.S., where they may be hard to find under this name.

Because MIPs are designed to provide a steady (usually monthly) income to their investors, the investment breakdown tends to be quite conservative.

Typically, 20%-30% of an MIP’s fund is invested in equity securities, while the remaining 70%-80% is invested in debt securities. The investment ratio poses a challenge for MIPs because dividends, which comprise much of the income generated by MIPs, are only paid on the profit generated by equity securities and not the initial investment itself. Therefore, MIPs’ performance resembles more dependable debt securities.

Despite their generally conservative makeup, MIPs are inherently risky, as are all investments. There is no guarantee an MIP will pay out monthly, and investors may even lose money during a market downturn. The level of equity exposure is affected by market volatility. In fact, the Securities and Exchange Board of India bars mutual funds from guaranteeing interest and dividend income to investors.

MIPs tend to limit the percentage of stocks in their portfolios in order to minimize the volatility characteristic of stocks. Nevertheless, MIP investors should be sure they can afford the potential for a (hopefully temporary) loss on their investment.

Pros
  • Can help generate steady revenue to supplement seniors’ income

  • Skewed in favor of debt securities, which are historically more conservative and reliable than equities

Cons
  • Not readily available in the U.S.

  • Do not guarantee income

  • As a hedge investment, they bear a certain amount of risk

Pros Explained

  • Can help generate steady revenue: This factor makes MIPs well-suited to supplement the income of senior citizens and retirees.
  • Skewed in favor of debt: This weighting usually makes MIPs more conservative and reliable than equity investments.

Cons Explained

  • Not readily available in the U.S.: MIPs are primarily an investment option in India.
  • Do not guarantee income: As with most financial investments, no payment is assured.
  • As a hedge instrument, they carry risk: Investors may lose money on MIPs during a market downturn.

Is an MIP the Right Investment?

The appropriateness of investing in a MIP depends on several factors. First, location plays a significant role. MIPs are not popular investment vehicles in the U.S. They are, however, more available in India.

Second, consider whether you have the means to weather a market downturn. MIPs do not guarantee payment, so any investor must make sure they can afford a loss.

MIPs are conservative investments and typically do not return large sums. MIPs are not the best choice for an aggressive investor seeking more growth in capital.

What Is the Tax Liability for an MIP?

U.S.-based MIP investors are taxed on MIP distributions at the standard interest and dividend rate. Earnings on investments sold in less than one year’s time are categorized as short-term capital gains and are taxed as ordinary income. As of 2021, long-term capital gains, which are earnings on investments held for a year or more, are taxed at either 15% or 20%, depending on the investor’s taxable income.

Key Takeaways

  • Monthly income plans (MIPs) are mutual funds designed to provide a regular income stream in the form of interest and dividend payments.
  • MIPs are designed for senior citizens and retirees who may not have enough dependable income sources to cover their expenses.
  • MIPs are more popular and available in India than they are in the U.S.
  • The debt-to-equity ratio of MIPs weighs more heavily in favor of debt securities, which are typically less volatile and more dependable than equity securities.
  • MIPs do not guarantee profit, and investors may suffer a loss during a market downturn.