In search of lost glory

That monthly income plans (MIPs) are passé is evident from the fact that there has not been a single fund launched under the category since November 2005. The category as a whole saw its assets increase by a mere 1.4 per cent over the one-year period ended January 31, 2007.

LIC Mutual Fund's MIP, with its assets under management (AUM) surging 93 per cent, was a bit of a surprise for those who had written the category off. Bank of Baroda's MIP, however, was not as fortunate, and the fund lost 97.74 per cent of its assets over the same period. HDFC MIP managed to retain its top position in the category with AUM amounting to Rs 1,194.72 crore.

Smart fund management coupled with higher equity exposure has induced these funds to produce respectable returns. The average return posted by the top 15 MIPs over the year ended January 31, 2007, was 11.26 per cent. The best among the lot was ABN AMRO MIP, giving 14.3 per cent return with an average 14.13 per cent equity exposure.

A large portion of the performance of these 15 funds can be attributed to their equity exposure ranging from 14.13 per cent to 24.25 per cent.

However, a mere exposure to equities is not the sure-short road to El Dorado, for a higher equity exposure comes with its own pitfalls. In fact the May-June 2006 crash translated into a 4.78 per cent (May 11-June 14, 2006) average loss for the category, with only three funds out of the 38 staying in the green.

Consequently, the after-effects were felt in the poor dividend payouts under the monthly dividend option during June-July 2006. The risk of equity is evident from the fact that the funds that managed to stay afloat had no investments in equities. Hence, even a small 2 per cent odd equity exposure is capable of wiping out any potential security provided by a large debt exposure.

Fortunately, since the May-June debacle, most funds have managed to stage a turnaround, making good their losses with the category as a whole giving an 8.86 per cent return (June 15, 2006 - February 9, 2007) since then.

Risk averse
By definition, yes. The fund management of MIP is risk averse. But that has not deterred the fund managers from taking considerable exposure to the mid- and small-cap stocks. Take for instance ING Vysya MIP Plan B, which invests all its 12 per cent odd equity allocation in mid and small caps. Reliance MIP and ABN AMRO MIP are other funds with considerable exposure to the mid and small caps.

A look at the debt portfolios of the category revealed some aggressive funds "� Birla MIP, Birla MIP II Wealth 25, Birla Sun Life MIP, DWS MIP Plan A, Prudential ICICI MIP "� with the average maturity ranging from 3.51 years to 9.11 years. Consequently, the portfolios are very sensitive to interest rate movements.

Of these funds, Prudential ICICI MIP, Birla MIP II, Birla MIP, Birla MIP II Wealth 25 and Birla Sun Life MIP continue to maintain their aggressive stance on the equity side with the majority of their equity allocation held in mid- and small-cap stocks.

LICMF Floater MIP Plan B bags the title of being the most expensive fund with a 2.47 per cent expense ratio.

Lost Glory
The writing on the wall is clear: The only recourse for MIPs lies in their equity exposure. At least in the near-term, debt instruments are likely to remain depressed. While the equity markets make hay as the economy shines with a 9 per cent plus growth (over the current fiscal), debt funds are shuddering under the pressure of inflation (currently at two-year highs) that has accompanied this growth.

The central bank has clarified its stand that its primary objective would be to rein in ever rising inflation. As of now, it is using interest rate revisions as its modus operandi. There have been two-staged hikes in the cash reserve ratio since December 2006, followed by a 25 basis point increase in the repo rate (the rate at which RBI lends).

The RBI now has a new arsenal in controlling money supply in the economy; it has been given the flexibility to alter the Statutory Liquidity Ratio (SLR) norms. The SLR is the amount of deposits that banks are required to maintain in the form of government securities.

Currently, the SLR is 25 per cent, and there has been speculation on the possibility of the RBI reducing the SLR, which could hurt the volumes in government bond market. Moreover, this demand from banks has often provided support to the market during bear phases. As regards the corporate debt market, it still considered to be in the nascent phase.

Those of you still counting on a return to glory of debt funds of the old days may be bitterly disappointed, at least in the near future. Till it happens, MIPs will have to look towards equities to boost returns.