Safety first?

SPECIAL REPORT

MIPs offer a viable investment option for those prefer safety, but don't mind a dash of equities.

With the equity markets well above the 8,000 mark, it is but natural that you become a tad more cautious about your investment decisions. The ride in equities is slated to continue for a while yet, but for the retail investor who prefers safer havens, monthly income plans (MIPs) offer a good option.

The reasons are two-fold. While the debt component ensures a regular income, there is an added equity component, which acts as a kicker to your returns. But of late, MIP returns have been driven by the equity portion. With the markets at all-time high levels, does it pose a higher risk for those prefer a safety first approach?

Better than debt
The average category returns of MIPs for the past 12-month period amounts to 11.68 per cent. This is much better than the low-single-digit returns provided by other debt categories.

The best performing debt fund category for example was short-term debt funds, which posted returns of 5.66 per cent, followed by floating-rate funds at 5.31 per cent.

Obviously, considering the bull run equities witnessed in the past couple of years, equity fund returns have overshadowed MIP returns to a great extent. For example, diversified funds have given 67.75 per cent returns on an average in the past year.

Even considering the unprecedented heights at which the equity markets are right now, there is an argument in favour of investing in MIPs. Especially if you are among those who prefer a regular income allied to the additional return from equity component.

MIPs are ideally suited for those who want a regular income to take care of their expenses, though unlike a fixed deposit, neither the return nor the capital is guaranteed in MIPs.

Traditionally MIPs invest 70-80 per cent of their assets in debt while the rest is allocated to stocks. Compared to the heyday of debt funds, when MIP returns were mostly derived from debt fund returns, with equity returns acting an icing on the cake, the situation is changing now.

Ten-year bond yields have risen to above 7 per cent compared to about 5.5 per cent two years ago. This has led to a decline in debt fund returns. Also it is obvious that nowadays equity portion of the portfolio drives much of the MIP returns. But there is a risk involved in the bargain. How will these funds cope if the equity markets take a knock?

According to Sandeep Bagla, debt fund manager at Principal Mutual Fund, MIPs are ideally poised to mitigate risk. "Historically it has been seen that when equity funds do well, debt funds don't do so well and vice versa. So in that sense the downsides in one category will be offset by the upsides in the other category."

Not the time to get in
But Bagla agrees that considering that equity markets are at all-time high levels, there is an element of risk involved in investing in MIPs. "I wouldn't recommend MIPs to those who are planning to make a fresh entry," says he.

"May be those who are willing to take a bit of risk can look for investing in MIPs with a conservative equity allocation, say 10-12 per cent."

Principal Mutual Fund's MIP Plus has been one of the better performers in the category with a yearly return of 13.85 per cent and has an allocation of 18 per cent to equities. But Bagla notes that if equities go up even higher, the scheme will reduce equity holdings.

"If we feel that there is an increasing risk to the equity component, we will reduce it to 12-14 per cent."

According to Rahul Pal, assistant fund manager at Sundaram Mutual Fund, the good thing about MIPs is that the risk is limited to the average 20 per cent allocation in equities. 
 

HOW THEY FARED Returns in % as on September 14, 2005
Scheme	3  months	6 months	1  year
Prudential ICICI Income Multiplier	8.47	9.67	19.37
UTI - MIS - Advantage Fund	7.23	9.54	16.94
HDFC MIP - LTP	6.35	8.45	16.90
Reliance MIP	8.68	12.06	16.62
Kotak Income Plus	5.16	7.47	14.48
Birla MIP II - Wealth 25	5.13	5.61	14.03
PRINCIPAL M I P Plus	4.86	6.39	13.85
HDFC MIP - STP	4.66	6.80	13.35
FT India MIP - Plan A	5.00	6.01	13.31
Deutsche MIP Fund - Plan A	5.43	6.55	13.23

"The majority of asset allocation in MIPs is in debt papers. This offsets the risk associated with the equity component," says Pal. "MIPs follow a low risk-low return strategy. In that sense, somebody who doesn't want to take too much risk, but doesn't mind a dash of equities in his portfolio can consider investing in MIPs," says Pal.

When it comes to investing in MIPs, the key thing is to consider the risk one is prepared to take in.

For instance, the equity allocation of various MIPs differs. Some schemes like Prudential ICICI Income Multiplier Fund (25.24 per cent), HDFC MIP Long-term (25.04 per cent), HSBC MIP Savings Plan (23.95 per cent) and Birla MIP-II have invested more than 20 per cent in equities. Needless to say, these schemes have been among the top performers in the category, given the rise in stock prices. 
 

WHAT THEY HOLD Asset allocation as on August 31, 2005
Scheme	Equity	Debt	Cash & equivalent
Prudential ICICI Income	25.24	46.00	28.76
UTI - MIS - Advantage Fund	16.37	49.32	34.31
HDFC MIP - LTP	25.04	59.91	15.05
Reliance MIP	19.99	27.13	52.88
Kotak Income Plus	15.91	41.96	42.13
Birla MIP II - Wealth 25	22.62	61.36	16.02
PRINCIPAL M I P Plus	18.07	69.89	12.04
HDFC MIP - STP	14.44	74.79	10.77
FT India MIP - Plan A	19.11	57.95	22.94
Deutsche MIP Fund - Plan A	17.35	43.90	38.75
Source: www.mutualfundsindia.com

What kind of returns can an MIP investor expect in future? According to fund managers, equities should be able to give an average 15 per cent return going forward.

Considering the fact that debt returns are unlikely to improve much from current levels at least in the near future, it stands to reason that MIPs will definitely outdo regular bond funds.

According to Bagla, existing investors in MIPs will be better off taking a long-term view, which will mitigate the volatility risk. This is especially true, considering that most fund managers expect interest rates to go up in future. Pal concurs with that view. "The longer you stay, the better your chances of making good returns," says he.

Investment analysts also advise investors to take at least a medium-term exposure to MIPs. The reasoning is that the high component of debt protects you from a severe erosion of capital in the event of a sharp fall in the market.