Fund managers suggest retail investors look at monthly income plans (MIPs) in the current market environment. Reason: Fixed income is performing very well (giving nine per cent and more interest) and they believe equities will see an uptrend towards the later part of this calendar year.
MIPs are debt-oriented schemes that generally invest up to 75-80 per cent of their corpus in debt instruments and the remaining in equity instruments. MIPs aim to provide reasonable returns on a monthly basis. The debt investments ensure stability and consistency while the equity instruments in the portfolio boost returns.
Given that 2011 was the year of debt, the returns on MIPs have been decent. For instance, HDFC Multiple Yield has given 10.74 per cent in the past year, ICICI Prudential Blended Plan B Option I returned 8.95 per cent, Birla Sun Life MIP II Savings 5 returned 9.48 per cent and DSPBR MIP gave 9.95 per cent, to name a few. In the same period, the Bombay Stock Exchange Sensitive Index or Sensex lost over eight per cent and the National Stock Exchange S&P CNX Nifty slid around seven per cent, as on March 27, according to Value Research.
| POCKETFUL OF CASH Returns as on March 27, 2012 (%) | |||
| 1-year | 3-year | 5-year | |
| HDFC Multiple Yield | 10.74 | 13.59 | 9.98 |
| ICICI Prudential Blended Plan B Option I | 8.95 | 6.59 | 6.59 |
| Birla Sun Life MIP II Savings 5 | 9.48 | 9.48 | 9.48 |
| DSPBR MIP | 9.95 | 10.69 | 10.69 |
| Equity-oriented Balanced Fund | 0.36 | 21.16 | 8.59 |
| Sensex | -8.28 | 19.75 | 5.63 |
| Nifty | -7.27 | 19.03 | 6.54 |
| Source: Value Research | |||
Ramanathan K, chief investment officer of ING Investment Management says, “MIPs are an all-season product for any type of investor, as it can earn you good returns whether the tide shifts to equities or to debt.” MIPs are typically advised to retired individuals because it helps as a source of regular income for them. But, others could opt for the growth option.
MIPs offer both growth and dividend options. The dividends are free in the hands of the investors though the fund house pays a dividend distribution tax of 13.53 per cent. But, if you are looking for regular income, then the dividend option cannot always be relied upon. The payouts would be at the discretion of the fund house and subject to availability of distributable surplus.
Of course, you cannot expect very high returns from this product if equities are doing well as the asset class forms a small part here and hence the returns are capped.
Ramanathan advises investors have at least two years horizon to make the most of this instrument. Presently, one stands to gain from MIPs because the market is at the peak of the interest rate cycle and the net asset value (NAV) of MIPs rises due to increase in bond prices. There is an inverse relation between interest rates and bond prices.
However, Krishna Sanghvi, head – equity at Kotak Mutual Fund, recommends MIPs only to those with very low risk appetite, as such individuals would not be averse to lesser returns. Those with higher risk appetite will not be satisfied with such returns.
Hence Renu Pothen, head – research at Fundsupermart.com, a mutual fund distributor, feels equity-oriented balanced funds will work more in favour of an investor. “An aggressive balanced fund can give a better rate of return than an MIP, while giving both the safety of a debt instrument and boost from equities. And, this will appeal to more number of investors,” she explains. Equity balanced funds have returned a nominal 0.36 per cent in the past year, according to Value Research.
Another advantage of an equity balanced fund is that it gets treated as an equity fund at the time of taxation. This means if you stay invested for more than a year, your money is fully exempt from tax. Due to higher debt component, MIPs get the benefit of indexation (20 per cent with indexation and 10 per cent without it) if invested in for over one year.
Equity-oriented balanced funds are riskier than MIPs. Balanced funds invest around 60-70 per cent in equities and the remaining in debt.
