Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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A Passionate SIP appeal and Why you should invest in a MIP?

Posted by Muthu on August 1, 2010

First and foremost, I would like to repeat my passionate appeal sent through SMS today to some of you urging to consider this month for investing in SIPs of Equity Mutual Funds, for a period of 20 years. If you’re already having SIPs, request you to consider increasing the quantum. The amount is immaterial, but is the duration is what it matters.

As always, we want to lead from the front and always do with your money, what we would do with our own. Our Family has started today fresh SIPs for  Rs.15,000/- per month for 20 years, in addition to our on going SIPs.

SIPs can be started during any month. There is nothing special about this month, except that we’ve an inner urge to focus more on the same this month. Let me make it very clear. We’re not being offered any unique special incentives by any Mutual Fund company to focus this month on SIPs. It’s our own inner urge.

In fact, if each one of you can refer us atleast one person whom you like most for investing in SIP , they’ll be immensely grateful to you, when the day of harvesting arrives. Occasionally, when I bump across someone to whom I recommended SIP 10 or 12 years go, when I was in BPO, the gratitude in their eyes is very evident. This gives me enormous satisfaction. So I can vouch for this from my personal experience.

If the person you like most is poor or belonging to very lower middle class like Driver, Maid, Office assistant etc. also, no problem. It gives us immense pleasure in serving them. Let the amount be even Rs.500/- or Rs.1000/- a month. We are not worried about the amount invested. What is important is the time (tenure) they are going to invest for? The ideal tenure is not less than 20 years and in exceptional cases, it is o.k. with 10 years. Nothing less than this, please.

All one needs for doing SIP is a PAN Card copy and a Bank account.

Please read my article (the link given below) to convince yourself and be passionate about SIPs.

https://wisewealthadvisors.wordpress.com/2010/07/29/a-perspective-benefits-of-investing-through-sip/

As you know, we do not believe in pushing products and is building our profession patiently and purely through referrals. However I feel very passionately how a whole generation can become financially independent through investing a small or fixed sum over a long period of time and wants to be a part of that process. I’m not soliciting any business from you and am trying my best to put in words, how strongly I feel about this.   

MIPs stands for Monthly Income Plans offered by Mutual Funds. Many a time people have confusion between SIPs and MIPs. 

SIPs are a way or method of investing in Mutual Funds.

MIPs are the hybrid (predominantly debt) products offered by Mutual Funds.

SIP is a method and MIP is a product.

So do not get confused between a SIP and a MIP.

We’ve mentioned earlier about ‘Asset Allocation’.  This means allocating your money amongst various assets like Land, House, Gold, Commodities, Art and Financial assets.

Financial assets are again classified into Debt and Equity.

Debt refers to products like Employees Provident Fund (EPF), Public Provident Fund (PPF), Postal Savings, Fixed Deposits, Senior Citizen Savings Scheme, Bonds, Debentures, Debt Funds offered by Mutual Funds etc.

Equity refers to Shares, Equity Funds offered by Mutual Funds, Equity based ULIPs offered by Insurance companies etc.

Mutual Funds offer a unique product called MIP (Monthly Income Plan) which normally invests around 75% to 80% of the assets in Debt like Government Securities, Commercial Papers, Certificate of Deposits, Credit agency rated bonds etc. They have the mandate of investing upto the balance 20% to 25% in Equity. They also have the option of staying 100% invested in pure debt, if the fund manager feels that it is not advisable to have equity exposure at a given point of time.

MIPs basically aim at protecting capital and also enhance the return over and above what one normally gets out Fixed Deposits and Postal Products.

I want to provide you an example of two of our favourite MIPs among our recommendations of few MIPs which are again amongst the entire universe of MIPs offered by all Mutual Funds in India.

Two of the MIPs we suggest as part of one’s core MIP holding, have provided annualized return in excess of 13% over the last 5 years period and have provided a annualized return of around 12% since inception.

Compare the above returns with your other fixed income products. You stand to gain around 4% more in good MIPs. A 4% difference can make a lot of difference to investors in Debt based products.

In the example given above, your capital doubles approximately every 6 years, by taking less risk.

Disclaimer: Mutual Fund investments are subject to market risks. Past Performance may or may not be repeated in future. MIPs are not guaranteed returns products like Fixed Deposits, Postal Savings etc.

The minimum holding period we suggest for a MIP is 5 years, to get a significant return over above a Fixed Income product.

A minimum holding period of 3 years is recommended, if you are looking for returns equivalent to a Fixed Income Product.

Please do not forget the above disclaimer.

MIPs offer tremendous tax advantage.

There are mainly two options to choose from, dividend option and growth option.

Most of the advisors in the market suggest dividend option for people who need regular income without realising how they are minimizing the returns and jeopardizing the cash flow of an investor by suggesting this option.

Let me tell you why.

Dividends from MIPs are tax free in the hands of investors. But they do not realise that the mutual fund companies pays 13.84% as ‘Dividend Distribution Tax’ on the dividends paid, out of the scheme (Investors’ money) effectively reducing the returns of investors. Not only that the percentage of dividend declared is not consistent, and there are months when dividend payments are skipped. People who are dependent on a fixed and regular cash flow suffer a lot because of this.

Instead if they invest in growth option and start withdrawing a fixed sum through SWP (Systematic Withdrawal Plan) from the 13th month onwards, they have two advantages. Being long term capital gains, irrespective of the tax bracket an investor belong to, the tax rate is only a flat 10.3% (without indexation).  This means they pay only 10.3% on the gains made viz-a-viz 13.84% tax on the entire money paid out as dividend.

Since the amount and date of withdrawal is fixed by an investor, he has a fixed, regular and predictable cash flow.

The withdrawal should start only from 13th month for the returns to be classified under ‘Long term capital gains’. If the amount is withdrawn during the first one year, it attracts an exit load of 1%. Not only that the returns are taxed as ‘Short term capital gains’, the tax rate being the tax bracket under which an investor falls into. If the investor is in the highest tax bracket, he has to pay tax at the rate of 30.9%.

Someone may ask, what I’ll do for one year without an income.

Very simple, what you require for the first year, keep it in your Savings Bank Account, earning 3.5% p.a. You invest only the balance amount for long term and can start the withdrawal from 13th month onwards.

The fixed income you would be getting out of your corpus, would be perpetual (subject to capital not getting eroded, for which chances are less, if you opt for a right percentage of withdrawal in discussion with your Personal Financial Advisor) and you can keep increasing your income by keep increasing the corpus.

How to increase the corpus, if you’ve no chances of getting money in future through any other means?

Simple Mr.Investor. We always advice to save atleast  20% of one’s income and keep reinvesting it in equity funds through SIPs (Systematic Investment Plan). This is to keep pace with inflation. If you don’t do this, the fixed income which you receive now, which is sufficient for your current cost of living, would cease to be sufficient in the years down the line.

As your SIP corpus keeps growing, once in 5 years or so, you can move the accumulated corpus to MIP. This would increase your MIP corpus, there by increasing your monthly income. Again you’ve to ensure that, atleast 20% of that money is saved through SIPs.

You’ve to keep doing this once in every 5 years so that your monthly income keeps growing and you will be able to manage the increasing cost of living.

Living long can be as risky as dying young, so says a great philosopher, who else, Mr.Muthu!

Just ensure that MIPs form a core part of your financial assets.

Any questions, please do write to me.

8 Responses to “A Passionate SIP appeal and Why you should invest in a MIP?”

  1. Praveen GB said

    Excellent article. I’m on SIP will definitely get a MIP 🙂

  2. rashmi said

    hello sir,
    thank u its a very helpful article and i would like to know other investment options. please help me out.

  3. David Muller said

    I would like to know what your thoughts are on “Caspian Trading Inc.” Monthly income Plans.I’m 67 and looking for monthly income. THANKS in advance

  4. Anand Kumar said

    Hello Sir,

    I have just got a job after graduation and would like to start investing in a tax saving scheme.
    I would like to know whether the SIP’s act as tax saving tool upto the limit of Rs. 1.0L or they are to be used only when one has an income surplus?

  5. sridhar said

    Question i am 42 yrs and like to start sip plans rs 10000to 15000 every month .IS it advicable to start this for 15 yrs in that case what wil be the returns i get

  6. Muthu said

    Any tenure equal to or more than 10 years is good for equity SIP. My feeling is that one can aim for an annualized return of 15%+ after staying the entire tenure.

  7. satyavan said

    Sir why 2 products sip in equity mf and MIP. Why not go for single balanced fund?

  8. Vinod said

    Sir iam salary based 37 year old ,Can invest 1500 Monthly , Please suggest should i go for MIP or SIP , Infact i want a lower risk and higher return schme. I have PPF account and three LIC, Please help and suggest me goood option. I can go for investment of 1500 Monthly for 12 years.

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