I am 35-year old, I want to start investing in a good MIP but want my monthly income to start close to retirement. Please advise how this can be achieved? Should I invest in growth option of an MIP fund and then transfer to the dividend option at a later date when I want regular monthly income? Is this good or is there a better option? I can invest around Rs 10,000 every month to achieve a good retirement income, Safety of investment is my first concern with returns that can beat inflation.
-Nandan Fernandes
Monthly Income Plans (MIP) are conservative debt-oriented funds that invest around 10 to 25 per cent in equity and the rest in debt. MIPs aim to provide regular dividends, although it’s not mandatory for the scheme. Dividends are paid at the discretion of the fund house and subject to availability of distributable surplus. These funds are expected to outdo inflation with their equity exposure. However, they have been unable to do so and are losing appeal. Since you are 35-years old, you have sufficient time at hand to build a good retirement corpus. Being a risk averse investor you should consider investing in balanced funds. These can fetch you returns better than MIPs for your long-term objective.
Balanced funds are equity-oriented hybrid funds that invest 60 to 80 per cent of their assets in equity and rest in debt. The debt portion brings stability in the fund's return and provides a cushion during market downside. Tax efficiency and automatic rebalancing is another advantage with these funds. Dividends from these funds are tax free and there is no tax on long-term equity gains. Also, you don't need to worry about rebalancing the assets, as it is managed by the fund manager.
You can shift your investments to fixed income assets when you are close to your retirement through the STP route. This will lock-in your gains.
This article was originally published on March 25, 2013.
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