At a time when the mutual fund industry is witnessing net outflows in most categories, monthly income plans (MIPs) are seeing sizeable inflows, as fund houses and distributors are actively promoting these schemes.
Industry estimates suggest that MIPs have been collecting Rs 1,500-1,800 crore monthly since October 2009. Although the product has been there for some time, fund houses had started to market it aggressively only recently. They are paying as much as 1.25 per cent to distributors as commission. The commission for most equity products is 50-75 basis points (bps).
So, distributors are finding it remunerative to sell these, rather than other equity diversified schemes. They had been slow on selling MF products after the entry load ban, mainly because margins had shrunk. Earlier, they used to get 2.25 per cent on every MF investment.
| LOSING CURRENCY CATEGORIES THAT SAW NET OUTFLOWS IN DECEMBER 2009 | |
| Funds | Net outflow (in cr) |
| Income | 140,789 |
| Equity | 2,185 |
| Balanced | 235 |
| Liquid/Money market | 14,267 |
| Other ETFs | 157 |
| Source: Amfi | |
MIPs are hybrid investment avenues that invest a minor portion of their portfolio (15-25 per cent) in equities and the balance in debt and money market instruments (like bonds, certificates). These appeal to both conservative and risk-taking investors, as they combine regular safe returns (from debt instruments) with higher payback when the equity portion does well.
"MIPs have been seeing lot of attention from HNIs (high net worth individuals), institutions, as well as retail investors. These funds performed very well over the past one year, as the equity portion has given good returns. For investors who have a slightly longer time horizon, it makes sense to invest in these products, as the equity portion is expected to post better returns in future, too. The investor rush is mainly due to the past performance of these funds," said Anil Chopra, CEO, Bajaj Capital.
The new popularity is shown by the fact that there are currently two ongoing new fund offers (NFOs) in the market. IDFC MF recently launched its MIP, which is an open-ended fund of funds. The scheme will invest up to 25 per cent in equity funds and the rest in debt funds. Sundaram BNP Paribas has also launched an MIP, which will invest up to 30 per cent in equity.
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"As of now, people have become very uncertain on equities and it is quite clear that interest rates will go up. In such a scenario, it makes sense to have a combination of equity and debt. Traditionally, a majority of the return has been coming from the debt portion, but of late, we have seen that equity has performed well and it has added to the returns of these funds.
The other reason is, one does not need to do a separate asset allocation for debt and equities, because MIPs are a very good asset allocation product,” said Ramkumar K, head of fixed income at Sundaram BNP Paribas MF.
Analysts said fund houses had increased the equity allocation in these funds over a period of time. Most schemes are now nearing their limit of 25-30 per cent, as stated in their offer documents. The debt portion has remained a poor performer, posting returns in the range of 7-8 per cent. Hence, the major contributor to returns has been equity. The Sensex has posted close to 80 per cent return during past year.
MIPs are taxed like a debt fund. The taxation rate is 28 per cent with indexation and 30 per cent without indexation. However, the dividends distributed by these funds are tax-free in the hands of investors.