Monthly and Quarterly Returns from Mutual Fund MIPs

In the context of mutual funds, investors should understand that there two components in total returns.

1. Dividends

2. Capital Appreciation

In other words, the fund may payout the profits of the scheme to the investors as dividends (in the dividend option) or the profits remain invested and continue to earn returns resulting in capital appreciation over a period of time (in the growth option). Depending on their specific needs the investors can opt for one of the two options.

Assuming you want monthly income, some hybrid funds have a very good track record of declaring regular monthly dividends. Depending on your risk appetite, you can opt for either balanced funds or monthly income plans. Balanced funds are equity oriented hybrid funds with at least 65% allocation to equity and the rest to debt. Balanced Funds enjoy equity taxation. Monthly income plans (MIP) are debt oriented hybrid funds with 20 – 30% allocation to equity and the rest to debt. MIPs are taxed like debt funds.

Depending on your risk profile, you can choose either balanced funds or MIP. You have not mentioned your age or risk profile. If you have higher risk appetite you can choose balanced funds. If you have low risk appetite you should opt for MIP.

Within Balanced Funds, schemes like L&T India Prudence Fund, ICICI Prudential Balanced Advantage Fund, Tata Balanced Fund etc have been paying regular monthly dividends, whereas schemes like DSP Black Rock Balanced fund have been paying quarterly dividends. Annual dividend yield is around 7 - 8% for some of these funds.

Within Monthly Income Plans, schemes like Birla Sun Life MIP II Wealth 25 Plan, ICICI Prudential MIP 25, UTI MIS Advantage, Tata MIP Plus, Franklin India MIP etc have been regular monthly dividends. Annual dividend yield of some of these schemes is around 5 – 7%. A major drawback of dividend options in debt funds like MIPs is that, while dividends are tax free in the hands of the investor, the fund house has to pay dividend distribution tax (DDT) before paying dividends to the investors. This reduces dividend yield considerably. If you are not in the highest tax bracket, you can work around this problem by investing in the growth option of the MIPs and opting for a systematic withdrawal plan (SWP). Through an SWP you withdraw a fixed amount every month and the balance units remain invested (and continues to earn returns). If you are in the highest tax bracket, then the dividend option makes more sense because your short term capitals gains will be taxed at a higher rate than the DDT rate.