An Alternative to Fixed Deposits
There are days when you feel the comfort of knowing your money is guaranteed safety in a fixed deposit, and then there are days when you think of ways that you could possibly improve your money’s performance than what it already is.
If you’re looking for something that can provide you with better performance than a fixed deposit at a low risk, then you might want to turn your attention towards monthly income plans.
A fixed deposit (FD) is a financial instrument provided by Indian banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. They are considered to be very safe investments. Term deposits in India is used to denote a larger class of investments with varying levels of liquidity.
An Monthly Income Plan (MIP) is nothing, but a debt oriented mutual fund which gives you income, in the form of dividends – simple as that. As MIPs are debt oriented mutual funds, they invest heavily in debt instruments like debentures , corporate bonds, government securities etc. It generally has 75-80% of its money in debt and rest in equity and cash . The income you can get from Monthly income plans is not limited to the monthly option. You can also choose to receive income quarterly, half-yearly or annually.
Fixed deposits are all very well so long as you’re not looking to make too much out of your money. But when you’re hoping to make the most of what little you do have, you need to look out for better performance at similarly low risk levels. Enter, monthly income plans. These are rather good alternatives to your dull and drab fixed deposits. These are basically debt instruments, which renders them a great deal safer than the volatile nightmare that is equity.
Monthly Income plans come in both dividend as well as growth options. If you were to go for the dividend option, you would get regular income from the amount that you’ve invested – as per the dividend declaration the fund makes. On the other hand, by choosing the growth option, you allow your money to grow without disturbing it.
If you should choose the dividend option, keep in mind that you will received them only as they are declared – on the profit and not on the capital itself. This is intended to ensure that the company doesn’t show itself to be giving out incomes that they actually don’t do. Even if they’re a debt instrument, fluctuating interest rates are likely to influence the scheme. At such points, the equity side of the deal comes in to play, ensuring some amount of profit to offset the volatility. Companies tend to pay out the dividend distribution tax before handing you the dividend.
Here, the money is not paid out to you in forms of dividends, instead it keeps growing in the mutual funds. Hence your money is just growing inside the fund itself and you can reap all the benefits at the time of redeeming the funds in future. In this option, you have nothing to do with dividends. Note that you get power of compounding in growth option because your returns also earn in future. Here is an article on difference between dividend vs growth option in mutual funds to give you a better idea of what I am talking about.
If you’ve got a large chunk of cash lying about uselessly, then the monthly income scheme is a good plan to invest it in.
You also have the option of choosing to have your dividend come in every month, quarter, bi-annually or annually.
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There are days when you feel the comfort of knowing your money is guaranteed safety in a fixed deposit, and then there are days when you thi...