MIPs lose flavour as bonds, equities tank

The first to pull out were institutions

Monthly income plans (MIPs), which were hot favourites among investors till last month, have fallen out of favour. Industry sources concede that most MIPs are facing redemption pressures and are having a tough time mopping up fresh funds.

According to industry sources, investors are pulling out as bond markets have been posting "negative returns" (losses) as expectations of a rate hike get priced in.

Even the equity markets have been southward bound over the last one month. The first to pull out were institutional investors who are obviously able to take call on the future movements in both the markets before retail investors.

Sashi Krishnan, chief executive with Chola Mutual Fund, agreed that these schemes may not be so popular now as they were earlier when markets were booming, but it was mostly institutional investors who were pulling out.

In fact this year, before the elections, a whole lot of MIPs were launched some of which were investing as high as 25 per cent in equities.

MIPs usually invest bulk of their corpus in debt to obtain a steady stream of returns, while a small portion is invested in equities to get that extra kick. It is this 'extra' that distinguishes MIP from pure debt funds.

According to data sourced from the Association of Mutual Funds, the industry body, total assets under the management of MIPs was around Rs 22,000 crore at the end of May 2004, accounting for 16 per cent of the total assets under management of the domestic fund industry. Official data for June is not available, but industry estimates MIPs to have lost more than Rs 1,000 crore in June.

Ravi Sharma, head of marketing at Birla Sun Life Mutual Fund, said: "Very little money was coming into such schemes now as fund managers are unable to produce the right kind of returns. In a good market, a MIP can give returns as high as 30 per cent. While a MIP is essentially a retail product, it is mostly institutional investors who put money into it. Retail investors largely opt for growth options as the dividend amounts received do not justify opting for the dividend option."

HDFC Mutual Fund operates the biggest array of MIPs with assets of Rs 2402.68 crore under management, followed by Pru-ICICI with Rs 1440.72 crore, and Birla MF with Rs 1406.49 crore.