MIPs are constructed in a very specific manner, and they operate under defined rules. Learn about the makeup of a typical MIP, the rules governing MIPs, and where MIPs are popular.
How Does an MIP Work?
Monthly income plans are conservative strategies designed to preserve capital and deliver regular income to investors. They’re more popular in India than they are in the U.S., where they may be hard to find, particularly by this name. Despite their generally conservative makeup, MIPs are inherently risky, as are all investments. There’s no guarantee an MIP will pay out monthly, and investors may even lose money during a market downturn. The level of equity exposure is affected by market volatility. In fact, the Securities and Exchange Board of India bars mutual funds from guaranteeing interest and dividend income to investors. MIPs tend to limit the percentage of stocks in their portfolios in order to minimize the volatility characteristic of stocks. Nevertheless, MIP investors should be sure they can afford the potential for a hopefully temporary loss on their investment.
An Example of an MIP
Typically, 20% to 30% of an MIP’s fund is invested in equity securities. The remaining 70% to 80% is invested in debt securities. This investment ratio poses a challenge for MIPs because dividends, which produce much of the income generated by MIPs, are only paid on the profit generated by equity securities and not the initial investment itself. MIPs’ performance therefore resembles more dependable debt securities.
Pros and Cons of Monthly Income Plans
Pros Explained
Can help generate steady revenue: This factor makes MIPs well suited to supplement the income of senior citizens and retirees.Skewed in favor of debt: This weighting usually makes MIPs more conservative and reliable than equity investments.
Cons Explained
Not readily available in the U.S.: MIPs are primarily an investment option in India.Don’t guarantee income: As with most financial investments, no payment is assured.They bear a certain amount of risk as a hedge investment: Investors may lose money on MIPs during a market downturn.
Is an MIP the Right Investment for You?
Whether investing in a MIP is appropriate for you depends on several factors. First, location plays a significant role. These are not popular investment vehicles in the U.S. Second, consider whether you have the means to weather a market downturn. MIPs don’t guarantee payment, so any investor must make sure they can afford a loss.
