Achieving the right balance of debt and equity is always a challenging task for an investor. These decisions are mostly influenced by stage of the investor’s life. Risk and return are two important components of investment. The risk and return are interrelated, both go hand in hand. Higher the risk, higher is the return and vice versa.
There are 4 phases in investor’s life
- Wealth creation phase
- Wealth consolidation phase
- Retirement age
- Wealth distribution phase
Allocation to equity, as an asset class, should be higher compare to debt during the wealth creation phase.
As an individual proceeds into the wealth consolidation phase, the equity allocation should gradually come down and debt allocation should increase.
The equity allocation should be considerably low while approaching the retirement age.
Investors should refrain from investing into equities during the wealth distribution phase to ensure that they can keep from outliving their assets while maintaining their desired lifestyle.
Monthly Income Plan (MIP)
It is debt-oriented mutual fund scheme that generally invests 75% to 85% of its amount in debt related instruments and the rest in equity related instruments.The debt part ensures consistency, stability and safety of capital while equity part helps in enhancing returns through capital appreciation.
Features of MIPs:
MIP’s offers investors an option to invest in debt as well as equity
They are suitable for investors who have nominal risk profile. The debt part provides regular income while the equity portion provides extra return. However, returns might get battered by a fall in market sentiment
It can be classified into Aggressive MIP. Further it can be classified into Conservative MIP based on portion of equity allocation. Larger the equity portion more aggressive is the MIP.
MIP’s are better if you have longer time frame for investment. Historically equity has given better results in long term.
Taxation:
In case of short term capital gain tax is applicable as tax slabs
In case of long term capital gain, tax is 20% after indexation. Holding period less than 36 months is recognized as short term in case of MIPs and holding period more than 36 months is recognized as long term.
Balanced funds:
The nature of balanced fund is different from MIPs. Balanced funds invests in debt and equity in almost equal proportion. Risk involved in such funds is less when compared to equity fund but it is more in case of MIPs
Features of balanced fund:
Balanced fund offers diversification by investing in bonds and equities
These schemes invests healthy proportion in equity, hence the returns on investment are good
Balanced funds provides automatic portfolio re – balancing an added benefit during volatile markets. Therefore, when markets are positive, the fund manager sells equity to keep its maximum level and vice versa.
Taxation:
Tax on short term capital gain under balanced fund is 15%. In case of long term capital gain, tax applies 10% in excess of 1 lakh.
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