Monthly Income Mutual Funds: Types & Features

Mutual Fund Monthly Income Plans aim at generating monthly income through a mix of debt and equity-based investments. For this, a significant portion of the fund portfolio focusses on interest-bearing assets such as corporate or government bonds and the residue is invested in equity. For investors with considerably lower risk-appetites, this mutual fund product can be a stable source of cash inflows, in line with the fund objective.

There are two fundamental types of monthly income plans, namely, growth and dividend.

Growth option

Operating in this mode, the fund administrators cycle the interest generated, back into the funds to inflate the Assets Under Management (AUM). On maturity, investors are paid the accrued amount in a lump sum.

Dividend option

These plans work similarly to share capital where dividend on earnings is paid at regular intervals. Such dividends are paid quarterly, bi-annually or annually, from a distributable surplus.Investors are offered with the choice of reinvesting their share or redeeming it. In case you reinvest, you can avail additional fund units at the prevailing Net Asset Value (NAV) . This strategy inflates capital gains when the investor finally redeems them.

This type of monthly Income plan is best suited to investors who are looking for options other than pure equity-based products . They have a broad-based investment strategy to ensure the safety of capital. Although the risk exposure is relatively lower compared to equity funds, returns are subjected to various market factors.

Monthly Income Plans operates on a debt-leaning portfolio, with some equity components. Fund managers adjust the degree of exposure to asset classes, according to prevailing market conditions to achieve fund objectives.

Although there are no entry loads , a 1% exit load is payable if units are redeemed within a year. Expense Ratio, covering fund administration charges may vary between funds and have an impact on investor returns.

Asset management companies that administer monthly plans are required to pay Long Term Capital Gain (LTCG) tax at 10% (20% with indexation). Dividend income is tax-free for the investor.

Monthly income plans are an excellent option for exploring the markets, undertaking low to moderate risks. They are ideal for investors seeking predictable and consistent cash flows on the capital invested.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.