Photo: iStock
Photo: iStock

MIPs do not guarantee a monthly income

As there is no assurance of income in MIPs, in case of bear markets, the returns can be dragged down, taking away a fixed income scenario which an FD delivers

My mother is 75 years old and wants to invest in mutual funds to generate extra income. Otherwise, she has pension and some fixed deposits (FDs) to draw upon. Me and my sister also support her. Would it be advisable for my mother to invest in monthly income plans (MIPs)?

—Nitin Kumar

If the existing income of your mother—pension income and interest from senior citizen FD—is not enough and/or to augment the current income, you can consider mutual funds having equity exposure to give the overall returns an extra push and to generate that extra 1-2% over and above the interest income.

Within mutual funds, you have mentioned MIPs. In this product, the name is a misnomer as they don’t guarantee any kind of monthly income and are mutual funds having both debt and equity allocation but predominantly debt exposure as the equity exposure is limited to 5-30% depending on the category of MIP. As there is no assurance of income, in case of bear markets, the returns can be dragged down, taking away a fixed income scenario which an FD delivers. At the same time, to generate an alpha in the portfolio, it is recommended to consider having exposure in MIPs, provided you do have a risk appetite. Instead of opting for a dividend plan, you can consider using the Systematic Withdrawal Plan (SWP) to ensure a steady income. However, ensure the SWP is opted at reasonable interest rate so that the principal corpus remains intact.

I have been investing in Public Provident Fund (PPF) for about 12 years now, and the account will be due for maturity or renewal soon. I have also been investing in two equity-linked savings schemes (ELSS) for about 10 years. Apart from this, I had a PF account for 11 years, till I became a consultant. All these investments are for retirement. But PPF interest rates have been falling and this trend is likely to continue. As I am a consultant now, no more addition is happening to my PF account. Should I close my PF and PPF accounts and invest that sum in another instrument? I have another 20 years before I would need a retirement corpus.

—Darshini Sehgal

PPF has been and remains a very popular scheme. It is one of the few schemes offering government of India security along with the benefit of tax saving under Section 80C of the Income Tax Act and tax-free maturity proceeds. The scheme carries a lock-in of 15 years, making it a popular scheme for long-term investment planning and hence is used more for retirement planning. And at maturity, the account can be further extended for a block of 5 years, thereby giving the advantage of extension in smaller blocks.

In your case the account is to be continued for another 3 years before it becomes due for maturity. And yes the interest rates of PPF have been coming down but then so is the case with all other fixed income securities. Currently, the PPF offers an interest rate of 7.6% with interest rates now being fixed quarterly. This implies that the rates can be more volatile in times to come. However, it still remains a good asset to hold as it provides you a stable, tax-free, fixed income return.

Your company PF is now a dormant and inactive account as there is no fresh contribution but still continues to earn interest. However, the interest earned and accrued does not continue to get a tax-free status as the same remains tax-free only till the time you are in active employment. And now you being a consultant, it is taxable on an accrual basis. This you can consider redeeming as the interest net of taxes would make it a low return asset class.

ELSS continues to remain a good asset class with high degree of tax efficiency as well as inflation adjusted returns. You can consider increasing your allocation in diversified equity mutual funds as you have a long-term investment horizon.

Surya Bhatia is managing partner of Asset Managers

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