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MIPs can be Risky

A MIP is not the ideal retirement investment as its equity allocation makes it a risky proposition…

I am a retiree and plan to invest a sizable sum in the MIPs. I looked into the dividends declared by Canara Robeco MIP and DSPBR MIP which stand at Rs 0.25 and Rs 0.18 per unit, respectively. At the outset the difference didn't look huge but when I sat down with a plan to invest Rs 5 lakh the difference became worthy of serious consideration. My question is both these funds have 5-star ratings and look the same too. So, where does the difference come from and how does one take a decision about investing in them?
- Subhash Sonawani

Dividend payment should not be the basis to evaluate the performance of any mutual fund. Funds periodically pay a part of their gains as dividend. An older fund with higher accumulated gains in its portfolio can pay higher dividend and can also be more regular compared to a relatively new fund. Such fund can also pay dividend in a period which might be more than returns earned by the fund.

It is pertinent to remember that Mutual Fund MIPs cannot be your primary source of income in retirement. As MIPs have a 10-20 per cent exposure to equities, it leads to risk, which can impact the capital invested in phases when the markets fare poorly. The dividend paid by the fund could be at the expense of capital erosion which can be detrimental to your income needs in post-retirement stage of the life. In comparison, the post office monthly income scheme (POMIS) protects the capital and pays out a guaranteed return in the form of monthly income, which you could consider if you are looking for a regular and steady monthly income in retirement.

Remember, investing in MIPs could, at best, be to supplement your retirement income and not something that you can entirely depend on for all your monetary needs. Where these funds score over the POMIS is in their ability to beat inflation over the long run with the equity exposure. Moreover, opting for a dividend option when investing in MIPs is tax inefficient because capital gain tax will be applicable to the dividend you receive. You should consider investing in the growth option in this fund and redeem units depending on your need for income after a 1-year time frame for tax efficiency.

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