Is monthly income plan for you?

WHAT IS IT?

A monthly income plan is an investment option where the investor will receive a regular amount of money every month. This monthly payout is generally done from a corpus that was built after paying some amount as premium for a couple of years. The way to trade-off among different variants is to look at amount of returns and predictability of returns, said Shyam Sunder, founder at Peakalpha Investment Services Pvt. Ltd. It works for those looking for regular income from their investments. In mutual funds, monthly income plan is debt-oriented funds with a small portion going towards equity.

HOW DOES IT WORK?

There are two phases— the accumulation phase, where the investor pays premium for a couple of years to form a corpus, and this is used in the second phase of distribution for payouts. It works through a regular pay of dividend. The plan will have 15-20% exposure to equity and rest in debt. Even if there is a dip in the equity portion, the debt instruments will provide safe coverage. The fund manager makes sure the fixed income part generates regular revenue. The equity part is used to get better returns. The returns in monthly income plans are likely to be higher than debt funds due to equity exposure.

WHO DOES IT SUIT?

Monthly investment plans are intended for monthly cash flow. It is a source of income that people use as a replacement for their regular salary payout; hence it is suited for retired individuals, said Sunder. People at that age are rather risk averse. Hence, this product can work well for the elderly. The tax implications will depend on the duration of your investment horizon. Monthly income plans are taxed as capital gains. A lot depends on how your fund manager manages the fund. Remember that it doesn’t always assure you of regular returns.