Advantages and Disadvantages of Monthly Income Plan

by Suggest Insuranc Make Your Own Decisions

Gap or discontinuation of your regular source of income due to any mishap can lead to disastrous situations and especially if someone has a single breadwinner in the family. The chaos because of the mishap is added by the financial uncertainty due to loss of the income. Most of the people are in the misconception that a regular insurance policy which pays out a lump sum amount at the time of claim will fulfill all their financial requirements, but you need to understand that a major portion of your claim amount is spent on the recovery of the mishap and you are left with no any stable source of income for your future. But a monthly income plan can wipe out all such worries as it gives you an alternate source of income for you and your loved ones.

A monthly income plan is a hybrid investment scheme in which 15-20% of the portfolio is invested in equities and the rest in corporate bonds and government securities. The returns which you receive through your MIP are market driven. MIP is for providing monthly income for the buyer, but the periodicity depends upon the option (monthly, quarterly, half-yearly and annual) chosen by the investor. With so many advantages, MIP has some disadvantages also. So let us understand the pros and cons of a Monthly income plan through this article.

Advantages of Monthly Income Plan

· A conservative investment option

It is good for people who are conservative in their investment, but want to earn better returns than a debt only portfolio. In a MIP, 70-80% of the total corpus is invested in debt instrument like debentures, government securities, etc., while a small equity exposure is maintained to earn something extra. A fixed income instrument is what a conservative investor looks for but sometimes they look for a return above investment and exposure to equity is the best option for such return, which is provided by MIP.

· Replacement for your regular income

If your regular source of income suffers a setback then a monthly income plan acts as a replacement for your regular income by providing fixed monthly income over a long duration of time. It also wipes out the dilemma of investment and saving decision regarding the claim amount received as a lump sum. Many people are not good at financial decisions of saving and investment, especially when it comes to huge amount of money. Such confusion leads to loss, which is generally seen when the family receives a huge amount of money at once from their insurance policy. But a monthly income plan wipes out such confusion because the benefit is given on a monthly basis as an alternative to the regular source of income.

· Periodic balancing of equity-debt ratio

The periodic balancing of the equity debt ratio allows your allocation to be balanced when equity performs well and debt may see a drop or vice-versa. For example, you have invested Rs.1000 in MIP in which Rs.750 is invested in debt and the remaining Rs.250 is invested in equity. So the debt-equity ratio in such case will be 750 : 250. Now let’s assume that the equity suffered a loss of 27%, while the debt remains steady with 9% return. Due to this condition, the ratio will become 817.5 : 182.5. This allows restoration of balance due to periodic balancing. If both equity and debt perform well, then you may get rewarded in the form of high dividend payout or allocate the same in a balanced ratio for reinvestment.

· Tax efficient

Monthly income plans are more tax efficient in comparison to FDs. All the dividends declared under a Monthly income plan are tax free while income from FDs is taxable and is taxed depending on the income bracket of the person. And if the interest income exceeds Rs.5000/- in a financial year, then TDS is applicable.

Disadvantages of Monthly income plan

· No guarantee of regular income

Most of the people have this myth that a monthly income plan gives regular monthly income, but the reality is that it doesn’t provide a guaranteed monthly income and this is because of the volatility of the market. There is also no regulation on the MIP part to declare regular dividends.

· Prone to mis-selling because of high commission

The commission received by the agent for selling monthly income plan is generally higher than other products and that’s why they are very much interested in selling an MIP. The high commission of MIP leads to mis-selling as the agents label Monthly income plan as a “Safe Fund” or the “Best Product”.

· Not fully safe

Don’t be in the misconception that Monthly income plans are fully safe, just because they are debt oriented product. Monthly income plans can also give negative returns, but that happens only in extreme cases.

Best Monthly Income Plans in India

Plan	Risk	Return	1 year return
HDFC MIP long term	Above average	High	18.20%
Prudential ICICI Income multiplier regular	High	High	17.88%
Birla MIP II Wealth 25	Above average	Above average	13.68%
Birla Asset allocation conservative	Above average	High	14.19%

A monthly income plan gives you a steady income flow by investing huge portion of the portfolio in debt and a small portion in equity but it comes with some disadvantages also. It all depends on your need and risk appetite that whether you want to go for a monthly income plan or not.