Monthly Income Plight

INVESTMENT WOES

It has been a sad quarter for Monthly Income Plans (MIPs). Most of them have not been able to declare regular or adequate dividends due to their lacklustre performance. The best performing scheme has returned 10.99 per cent over the last year to date, whereas the worst performing has returned a measly 2.33 per cent. The category average is also not very encouraging with returns of barely 5.65 per cent.

This performance, if observed closely, shows a disturbing trend. Index funds, which closely track the Sensex or Nifty, have shown returns of around 17 per cent over the last year to date. Moreover, most debt funds have given yields over 7 per cent during this period. In other words, while the benchmark equity indices have gone up, most MIP funds have actually incurred losses on their equity component of their portfolio, thereby dragging down total returns. And this, in spite of the fact that that their exposure to equities is just around 15-20 per cent of the total fund size.

The profile of investors in the MIPs is generally senior citizens and ones with a conservative risk profile. Therefore, MIPs are designed in such a way that their returns should be a few percentage points above debt funds. This is due to the presence of equities as a small component of the portfolio, which acts as a "kicker" when the markets move up. However, over the last one year , while equity markets have moved up, MIP equity investments have under performed. This has let down investors, who are wondering whether they have any choices. Let us look at a couple of alternatives.

Let us divide the MIP investor in two categories; First, who need safety of capital and a regular monthly income. Second, who do not require a regular monthly income, but have a conservative risk profile and seek capital protection.

For the first category of investors, Monthly Interval Funds, recently launched by some mutual funds, are a good option. These funds invest purely in debt instruments, thus providing lesser volatility and greater capital safety than MIPs, which have an equity component of around 15-20 per cent. Moreover, with rising interest rates, these funds are giving yields over 9 per cent of late. While the returns are not guaranteed, these funds announce the monthly indicative yield in advance, which changes every month.

They have a dividend option, with a lower rate of dividend distribution tax, as compared to money market or liquid funds. Moreover, if investors stay invested for more than a year by rolling over the investments over 12 consecutive months, these investments are eligible for tax treatment under long-term capital gains. The only disadvantage of this scheme is in terms of liquidity, since investments can be redeemed only once a month on a fixed date without any exit load. Any withdrawal on other dates will be subject to an exit load.

For the class seeking capital protection with some exposure to equities and are willing to lock-in their funds for a period of three to five years, there is the option of capital guarantee schemes. These funds are close-ended schemes with maturity after three or five years. They guarantee protection of the principal amount on maturity. Better known as hybrid funds, they have exposure in both debt and equity.

Let us consider the three-year fund, since its asset allocation in terms of percentage debt and equity exposure, would be quite similar to an MIP. For every rupee the investor puts into such a fund, the fund manager buys debt instruments with a three-year maturity of around 80 per cent of the portfolio.

At a conservative yield of 8 p er cent per annum, the maturity value of these bonds would be over a rupee after three years, thus enabling the fund to return at least the capital guaranteed to the investor. The balance 20 per cent is invested in equities with a three-year time horizon in mind. If equities perform at even 15 per cent per annum., the investor's total returns from these funds would be around 30 per cent, or 10 per cent per annum, and that too with a capital guarantee. The only disadvantage is that the investments are locked in till maturity.

The two alternatives discussed above cater quite well to different requirements of investors by providing scope for monthly income or capital growth, as desired by the investor. This combined with a very high degree of capital safety makes them seem a better choice over MIP's in addressing investor needs.

The writer is a Kolkata-based financial planner and can be contacted at rishi@touchstonewealth.com