Equity markets have been volatile with a downward bias for some time. Obviously, Jayant Kothari is unwilling to commit more into equities, despite being bullish on them. The reason: Though he is interested in equities, there is little clarity if things will get better or worse from here. "There is no reason for me to take more exposure to equities till the market bottoms out," he explains. For such investors, financial planners are advising monthly income plans (MIPs).
MIPs, which invest 70-80 per cent in debt and the rest in equities, are typically meant for the retired, because it becomes a source of regular income for them. But one could opt for the growth option as well.
The sharp fall of around 17.35 per cent in equities in the last one year has reduced the average returns from MIPs to just about two-three per cent. In contrast, pure debt funds and FMPs on the other hand, have given around 9 per cent.
| A GOOD BET FOR THE RISK-AVERSE Returns offered by various MIP schemes | ||||
| Scheme name | 1 year | 2 years | 3 years | 5 years |
| HDFC MIP-LTP(G) | 1.23 | 6.77 | 15.51 | 10.07 |
| Reliance MIP(G) | 0.84 | 6.23 | 14.74 | 10.15 |
| UTI MIS Adv(G) | 1.11 | 5.13 | 11.64 | 8.53 |
| ICICI Pru MIP 25(G) | 2.18 | 5.91 | 13.13 | 7.34 |
| Birla SL MIP II-Wealth 25(G) | 1.93 | 5.52 | 13.30 | 6.72 |
| L&T | 2.45 | 4.34 | 7.35 | 9.07 |
| Returns in % Based on AUM size | ||||
However, financial planners are betting on MIPs for a slightly longer term, say one to two years. This is because they expect the Reserve Bank of India to go for another hike tomorrow, and there could be a pause after that. And if rates were to start slipping after six months, there could be positive impact on debt instrument because of the price rise (there is an inverse relation between interest rates and prices of debt instruments). As a result, the net asset values (NAVs) of MIPs could see a spike.
"The debt portfolio of the MIP would provide sufficient stability and accrual to the portfolio while the equity component will act as a return kicker and generate alpha for investor," says Gajendra Kothari, managing director, Etica Wealth Management.
MIPs are less risky than equity-balanced funds that invest around 60-70 per cent in equities but are more or less than debt balanced funds. But they are more risky than pure debt funds.
But industry experts are advising MIPs not just because of the interest rate cycle. They say that the equity edge allows them to earn better returns over the long term, even under normal circumstances. So the young, who are not so risk-averse, can take advantage of this instead of going for pure debt products.
Hemant Rustagi, ceo, Wiseinvest advisors, says investors with a five-year horizon, can look at parking some portion of their portfolio in MIPs. MIPs have given close to 10 per cent returns over the last five years. "If you are willing to live with the volatility caused by of interest rate and equity movements, MIPs can give you better returns on average than any other debt product," he says.
MIPs offer both growth option and dividend option. 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 on. The payouts would be at the discretion of the fund house and subject to availability of distributable surplus.
For monthly disbursements, there are other options like the post office monthly income scheme (POMIS). It gives an assured 8 percent annually plus a bonus of 5 per cent on maturity.
Any capital gains earned from sale of units before a year will be added to the individual's current income and taxed, according to slab. Otherwise it will be treated as debt funds and taxed at 10 per cent tax without indexation benefit or 20 per cent with indexation benefit.
