Not monthly nor income

As expected, equity mutual funds have had a torrid time in the past month, with all-round erosion in their net asset values. A closer look, however, shows that they have acquitted themselves rather well, given the carnage in stocks.

To be sure, they have given negative returns over the month, but that's no surprise considering that stocks nosedived during the period. What's important is relative performance, and most mutual funds have been able to comfortably beat the Sensex. Only petroleum funds have fared even worse than the Sensex.

Technology funds have been relatively the best performers among equity funds, thanks to the new-found discovery of technology stocks as a comparatively safe haven, insulated from the domestic economy.

FMCG funds too haven't done too badly, perhaps because FMCG stocks were beaten down so much earlier, while pharma funds too had losses that were less than double digits on an average.

In fact, May was a terrible month for debt funds as well, with all fund categories except short-term and money market funds posting negative returns. Some balanced funds have in fact performed worse than technology funds.

Of course, on the whole debt funds did less badly than equity funds, but it's important to note that all the asset markets are turning simultaneously, with the debt, equity and commodity markets all feeling the heat as the cycle turns and emerging markets fall out of favour.

The effect of the elections, which raised the risk premium, was likewise felt across both the debt and equity markets in India.

Under these circumstances, it's no surprise that the so-called monthly income plans (MIPs) have been skipping their dividends. These funds were marketed on the theory that their limited exposure to equities would add a bit of gloss to low returns from their predominantly debt-oriented portfolios.

Investors who had watched with envy the sizzling returns that equity funds provided last year, but couldn't muster the courage to go for a growth fund, believed that MIPs would be a mix of security and high returns. Small wonder that the risk-averse small investor flocked to MIPs in droves.

The upshot, of course, has been unfortunate "" not only have there been no monthly returns, investors have also seen an erosion of their net worth. It's clear, therefore, that the marketing strategy adopted by some of the MIP schemes was misleading.

Importantly, the very term monthly income plan implies a regular monthly income, and certainly does not reflect the true nature of the risks the investor runs by investing in these schemes.

While it's true that adding a dash of equity to a portfolio could increase risk-adjusted returns over the long haul, the key point is that it works only over the long term. Calling a scheme a monthly income plan, on the other hand, indicates to the investor that he or she will start getting returns immediately, and accordingly, does a disservice to the investor.

In particular, given the dismal levels of awareness that prevail among investors in this country, mutual funds should be extra careful about what they call their schemes. It's time the Securities and Exchange Board of India took a re-look at MIPs.