A friend of mine is a freelancer and hence does not earn a regular income.

To circumvent this, she decided to invest in an instrument which would generate some amount of money every month. When she actually looked around for options, she realised that there were just two.

If you find yourself in the same boat, here's what you can consider.

• Is a close ended fund for you?

Post office

While this is a good option, investors were disappointed to note that just this week, the bonus was terminated on fresh deposits.

Let me explain.

The post office monthly income account scheme � POMIA � is a six year deposit which gives you an interest rate of 8% per annum. This amount is not given at the end of the year or at the end of six years but every single month.

Let's say you invest Rs 1,00,000 in this deposit. At 8% per annum, you will get Rs 8,000 every year. Divided by 12, it will amount to Rs 666 per month.

Besides this, on maturity, a 10% bonus was payable.

So, besides earning interest of Rs 48,000 over the six years, at the end of the tenure, your Rs 1,00,000 would be returned along with Rs 10,000.

Totally, this would amount to a return of a little over 9.5% per annum.

Now, this bonus has been scrapped for fresh deposits starting from February 13, 2006. So you will still get 8% per annum, but on maturity, only your principal will be returned, no additional amount.

Please note, if you already have such an account, you will get the bonus. It is only terminated for fresh accounts.

Mutual funds

Monthly Income Plans of mutual funds do not give a fixed rate of interest but a dividend.

Unlike a fixed deposit, the returns are not guaranteed. Neither the frequency of the dividends nor the rate of dividend. The dividend is not fixed and is declared as a percentage of face value - which is Rs 10.

Still, they are an ideal choice for investors with a moderate risk appetite seeking some form of income.

They are targeted at two sets of investors:
- Those who are looking at some form of periodic income.
- Those who do not want to invest in diversified equity funds or even balanced funds (funds that invest in both equity and debt).

These funds invest more in debt (fixed return investments) than in equity (shares). Hence they are safer than equity funds and balanced funds. Moreoever, the average one year return of 10.41% is higher than what you will get on a conventional fixed deposit or a post office deposit.

• Are you afraid of mutual funds?

Deciding between the two

Liquidity

With the post office scheme, your money is blocked for six years. Sure, you can withdraw but only if you pay the penalty.

If you break the deposit before three years, you pay 2% on the amount invested. If you break it after three years, it is 1%.

With a fund MIP, you can sell your fund units any time. All funds charge a load, either an entry or an exit load. A load is a percentage you pay either when you invest in the fund (buy units) or you redeem your investment (sell units).

Assured returns

The mutual funds give a higher return. The average return is 10.41% per annum while the post office offers 8% per annum.

However, the returns on the post office are assured. The stock market may rise or fall, interest rates may fluctuate but you can be sure of 8% per annum.

Not so in the case of mutual funds. It is not assured. It could increase or decrease substantially. If the fund is doing well, they could declare a 10% dividend (10% on the face value of Rs 10). The next dividend may drop to just 7%.

Frequency of returns

The post office will give you that fixed amount every single month. Not so in the case of the mutual fund.

If the fund is not doing well, they may not declare a dividend for months. Despite being called a monthly income plan, it is not mandatory for them to declare a dividend every single month. They may strive to do that but are not bound to do so.

Choosing the right MIP

The post office is definitely safer bet. But, what you could do is invest part of your money there and part of it in fund MIPs. Here are the best mutual fund MIPs in terms of returns. But, when making your selection do take a look at the risk too.

Birla Asset Allocation Conservative
Risk: Above average
Return: High
1-year return: 14.19%

Birla MIP II Wealth 25
Risk: Above average
Return: Above average
1-year return: 13.68%

DSPML Savings Plus Aggressive
Risk: Average
Return: Above average
1-year return: 12.50%

Franklin Templeton India MIP
Risk: Above average
Return: Above average
1-year return: 10.13%

HDFC [Get Quote] MIP Longterm
Risk: Above average
Return: High
1-year return: 18.20%

Kotak Income Plus
Risk: Below average
Return: Above average
1-year return: 13.66%

Principal MIP Plus
Risk: Average
Return: Above average
1-year return: 11.21%

Prudential ICICI [Get Quote] Income Multiplier Regular
Risk: High
Return: High
1-year return: 17.88%

Reliance [Get Quote] MIP
Risk: High
Return: Above average
1-year return: 16.96%

Sundaram MIP
Risk: Average
Return: Above Average
1-year return: 12.92%

UTI MIS-Advantage Plan
Risk: Above average
Return: High
1-year return: 16.97%

Mutual fund data supplied by Value Research. Returns are calculated as on February 15, 2006.