Tue, May 10, 2011 | Updated 07.39PM IST

The post office's monthly income scheme (PO MIS) and the monthly income plans (MIPs) sponsored by mutual funds both offer monthly returns. But which one isbetter? The government-sponsored PO MIS gives an assured return of 8% payable monthly plus a maturity bonus of 5%, while MIPs offer better liquidity and alsoreturns by deploying 5% to 25% of total assets in equity and the rest in debt products.

WHAT ARE MIP, MIS?:

Monthly income plans (MIPs) are hybrid mutual that invest about 80% to 100% in debt and the rest in equity. The returns are not guaranteed. The returns of themonthly income scheme, on the other hand, are guaranteed by the government of India.

GIMMICKS:

MIS assures a return of 8%, plus a maturity bonus of 5% after a tenure of six years. The post office website claims that if the monthly interest payments areinvested simultaneously in the post office-sponsored recurring deposit scheme (it earns an interest of 7.5% compounded quarterly), the effective yield comes to10.5%. However, a closure scrutiny suggests this is a marketing gimmick; the effective return on maturity proceeds, inclusive of the bonus amount, turns out to be8.77% . Also, the interest income is taxable at the hands of investors. So, the yield reduces further. Let us suppose you invested . 1,20,000 in MIS where themonthly interest components of . 800 are invested in the recurring deposit (RD) scheme, which returns 7.5%, compounded quarterly. So, the RD's maturityamount comes to about . 72,806. This, along with the bonus amount of . 6,000 (5% of . 1,20,000), plus the principal component (a total sum of . 1,98,806), givesan effective yield of 8.77%. The MIP also resorts to a marketing gimmick. A monthly income plan would suggest that the schemes offer some returns everymonth. However, the monthly dividends from such schemes are not guaranteed. Dividends are subject to the availability of distributable surplus and it is solely atthe discretion of the fund house. So, if the market goes through volatile times or nosedives for a long period , no dividend may be declared. As MIPs invest 15-20% in equities, they are subject to market risks. Nonetheless, a good fund manager manages the MIP in an effective manner and takes calculated risks to givesteady returns.

WHERE AND WHEN TO INVEST?:

Inflation has been a demon, continuously eating into our returns. Hence, all investors look for a product that generates alpha over the inflation rate. In the currentburgeoning inflation rate scenario , returns do matter. If it comes at alittle additional risk, so be it. Senior citizens or persons looking for a fixed monthly return canconsider investing in steady performing MIPs with a good track record of doling out monthly tax-free dividends. Ideally, investors looking at monthly payout MIPsfor a longer period should invest at ex-dividend NAV on any particular month so that they get more units. As a result, the monthly payouts, ie, monthly dividendyields they get would be high. If monthly dividends are not required, an investor can choose the growth option.

TAXATION:

The monthly dividends from MIPs are subject to a dividend distribution tax of 13.84% for individuals ; however, if you sell the units within a year, the gain, if any,would be subject to your personal income tax slab. If you sell units after a year, a 10% long-term capital gain tax or 20% with indexation would be levied. Theinterest income on PO's MIS would be subject to your personal income tax slab; so, the 8% fixed return no longer applies here.

WHICH ONE TO CHOOSE?:

If you are seeking returns higher than the traditional products like MIS, then MIP is worth considering. One should invest in MIPs with a minimum investmenthorizon of 2-3 years. Also, you should not bank upon MIPs for monthly dividends, but you can rest assured of steady returns. However, if you are a conservativeinvestor seeking monthly payouts without taking any market-related risks, then you should stick to post office's MIS.

Amar Ranu, senior manager - wealth management, Motilal Oswal Financial Services

10 MAY, 2011, 06.52AM IST,

Post office or MF? Let risk appetite decide monthly income option15 Reasons to buy Gold : Wealthdaily.com/Gold_Report - Gold, two steps ahead: how the rich keep gettingricher. New gold rpt

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