How to get monthly income from mutual funds

Apart from capital appreciation, mutual funds can provide investors with regular income if they invest in the right funds. Here’s how to get monthly income from mutual funds

Kavya Balaji   /   December 22, 2020
monthly income from mutual funds

Typically, people invest in equity mutual funds because they provide higher returns in the long run. This is because of the capital appreciation from redeeming the mutual funds. However, one can make monthly income from mutual funds by investing in a Monthly Income Plan (MIP) and regular equity mutual funds. This can be done tax efficiently. Read on to find out.

Monthly Income Plans or MIPs

The objective of MIPs is to generate regular income for the investors. They can be in the name of Income Optimiser, Regular Savings, Savings Income, etc. MIPs are hybrid funds and invest in a mix of debt and equity asset classes. Most of the time these are debt-oriented funds with up to 25% of their assets in equity. This equity exposure helps investors get higher returns from MIPs as compared to pure debt funds. Many of the mutual funds in this category have provided investors with a return of 11%-12% a year. This is much more than what is offered by banks for their fixed deposits. 

Advantages of MIPs

MIPs provide more returns than traditional schemes such as the Post Office Monthly Income Scheme (POMIS) and deposits. Unlike POMIS where the maximum investment is Rs. 9 lakh for a joint account, there is no limit on the maximum investment for MIPs. The POMIS is for 5 years while there is no lock-in or tenure for MIP funds. MIPs do not have any entry load. The exit load for MIPs is less than 1%. With MIP funds, investors can take advantage of liquidity while getting dividends from the fund.

Disadvantages of MIPs

You need to note that the fund doesn’t guarantee monthly income. The funds provide more dividends than any other mutual funds so that investors can rely on the fund as a source of income. Understand that dividends are paid out based on profits made by the fund. 

Are MIPs risky?

This depends on how the fund invests. If the equity investment of the funds is lower than 15%, then, the fund might be best suited to low to medium risk investors who want to diversify their portfolio while getting income from the mutual fund.

Note that an MIP that has a high average maturity is riskier than a fund with low maturity. Why? This is because long term fixed income investments are subject to interest rate risks and the longer the maturity of the security, the higher the interest rate risks. However, this will depend on how interest rates move. If the MIP has higher allocation to mid and small cap stocks, the fund is riskier than a fund that invests in large cap stocks. 

MIPs are taxable. You will need to pay short-term capital gains (STCG) and long-term capital gains (LTCG) taxes if you redeem the MIP funds. STCG will be added to your income and taxed as per your tax bracket. If the units are held for more than three years, then LTCG will be taxed at 20% with indexation benefits. You don’t need to pay Dividend Distribution Tax (DDT) as the mutual fund house will pay the tax before providing you the dividend income. The taxation will be low if you choose to remain invested in MIPs for the long term.

Systematic Withdrawal Plan (SWP)

SWP is a plan where you can withdraw money from your investment periodically. You can get regular income by withdrawing a particular amount every month or quarter. The remaining investment will continue to earn money for you until you withdraw it. Note that this is an option where your capital will get depleted over time. You should opt for this plan only when you think there will be an income shortfall. There are investors that use SWP for de-risking their portfolio in the long run. They withdraw from equities and put the money in fixed-income investments.

However, note that over five to seven years or more, equity funds provide inflation beating returns. For instance, the five-year return for most equity funds is more than 14%. This means that using SWP you can get income while making more money as compared to deposits or debt funds. So, one can withdraw at least 4% a year and still make money on the investments. 

Another advantage is taxation. Unlike deposits the income from SWP will not be added to your salary income. Only the capital gains will be taxed on withdrawal. If your long-term investments (of more than a year) are withdrawn, the tax is just 10%. This means that SWP provides tax efficient, regular income. The SWP facility is available for all open-ended funds. 

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