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Why should you consider switching from MIPs to Balanced Funds?

Monthly Income Plans (MIPs) are funds that have a mix of both equity and debt. The composition is generally around 15-35% in equity and 65-85% in debt.

MIPs come with different variations – Conservative, Moderate and Aggressive. The allocation differs based on this. Conservative MIPs usually have the least weightage to equity and aggressive MIPs have the highest weightage to equity.

Balanced funds are also hybrid in nature. They too have a mix of equity and debt. The equity component is around 65-70% and the debt component is around 30-35% in the portfolio.

For taxation purposes, MIPs are classified as debt funds and Balanced funds are classified as equity funds.

Here is a snapshot on the prevailing tax rates on dividends and capital gains of equity and debt oriented schemes.

Description Individuals / HUF Domestic Company NRI
Equity Oriented Schemes Nil Nil Nil
Debt Oriented Schemes Nil Nil Nil
Dividend Distribution Tax (Payable by the Scheme)
Equity Oriented Schemes Nil Nil Nil
Debt Oriented Schemes 28.84% (25% + 12% Surcharge +3% Cess) 34.608% (30% + 12% Surcharge +3% Cess) 28.84% (25% + 12% Surcharge +3% Cess)
Capital Gains Tax
Equity Oriented Schemes (Long Term if Units held for more than 12 months; Short Term if Units held for 12 months and less)
Long Term Capital Gains Nil Nil Nil
Short Term Capital Gains 15% 15% 15%
Debt Oriented Schemes (Long Term if Units held for more than 36 months; Short Term if Units held for 36 months and less)
Long Term Capital Gains 20% 20% Listed – 20% (with indexation) Unlisted – 10%
Short Term Capital Gains As per IT slab 30% As per IT slab

Please Note: Securities Transaction Tax (STT) will be deducted on equity funds at the time of redemption / switch to other schemes / sale of units.

MIPs usually payout monthly, quarterly or annual dividends. Most schemes allow the investor to choose the dividend frequency.

Though these dividends are tax-free in the hands of the investor, the fund house pays a dividend distribution tax which is at 28.84%.

Balanced funds, which are classified as equity funds enjoy a favourable taxation compared to MIPs. Dividends are tax free in the hands of the investor and when distributed by the fund house. The quantum and frequency of dividends are based on the discretion of the fund manager. However, there are few schemes that offer monthly dividends.

During the budget announcement in July 2014, the holding period for long term capital gains in debt schemes was increased from 12 months to 36 months.

This has made MIPs even more unfavourable compared to Balanced Funds. One has to hold MIPs for 3 years in order to claim long term capital gains taxation. In contrast, Balanced funds enjoy nil capital gains tax for units held for more than 1 year.

House View

Considering the taxation differences stated above, it would definitely make sense to go overweight on balanced funds compared to MIPs.

However, one should note that the additional equity component means additional risk.

Investors with above average risk tolerance (moderate and aggressive risk appetite) can consider switching from their current holdings in MIPs to Balanced Funds. However, one has to carefully assess the benefits of favourable taxation in relation to the additional risk component.

Please Note:

Kindly refer to the Radar for approved schemes.

Kindly contact your relationship manager for your portfolio specific actionables.