Can Mutual Fund MIP give higher returns than Fixed Deposits

You are right. After the RBI cut rates at the end of September, most major banks have announced reduction in the base rates by 25 to 40 basis points, resulting in deposit rates going down. Fixed Deposit rates will go down even further in the near to medium term, when RBI announces further rate cuts. Naturally, many investors will find it increasingly difficult to rely on Fixed Deposits for their monthly income needs. Mutual fund Monthly Income Plans are good alternative investment opportunities for such investors, provided they have a some tolerance for volatility. Mutual fund Monthly income plans (MIPs) are debt oriented hybrid fund, which have around 75% debt investment in their portfolio and around 25% equity investment. The debt portion of the portfolio ensures stability of the investment, while the equity portion gives a kicker in returns. Over a 10 year investment horizon, top performing MIPs like Birla Sun Life MIP II Wealth 25, ICICI Prudential MIP 25, Reliance MIP, UTI MIS Advantage Fund, HDFC MF MIP Long Term Plan etc, have given in excess of 10% annualized returns. In the last one year top performing funds have given in excess of 12 – 13% returns. However, you should remember that mutual funds are subject to market risks and past performance does not assure future returns. That said, based on the nature of underlying investments in Monthly Income Plans, over a sufficiently long investment horizon, one can expect a few percentage points higher returns than fixed income investments from MIPs due to the equity kicker.

If your father needs a monthly income from his investment he can select the monthly dividend option of MIPs. Most top performing MIPs have an excellent track record of paying regular monthly dividends. However, you should note that the historical annual dividend yield is around 6 – 8%. A better option, if your father is in a lower (less than 30%) tax bracket is to invest in the growth option of the scheme and opt for systematic withdrawal program (SWP) to draw fixed amount monthly from the scheme as per his needs. It is more tax efficient than the dividend option, because while dividends are tax free in the hands of the investor, the mutual fund has to pay dividend distribution tax (around 28%) for debt funds before paying dividends to the investors. If your father is in the 20% or below tax bracket, then his post tax returns will be higher in the SWP from growth option compared to dividends. However, when opting for SWP you have to be mindful of exit loads and plan accordingly. You should discuss your father’s financial needs with his financial advisor and make the appropriate investment decision.