Skip to main content

Monthly income plans are with risks and rewards too



THERE has been a spate of recent advertisements seducing investors towards the monthly income plans (MIP schemes) of mutual funds. Despite all advertisements of mutual funds bearing the warning that past performance does not guarantee future performance, the lay investor can and does get swayed into thinking that the good times will roll forever.


   This category of investment was launched during the start of the stock market boom, and hence had a dash of equity built into the scheme. The objective was to pay out monthly dividends — this would be tax-free in the hands of the investor and thus have an edge over the relatively safe schemes such as the Post Office Monthly Income Scheme. Over time, we can now invest in quarterly and annual options, or even the growth option, making us wonder whether the title of the scheme needs to be renamed.

Structure Of The Scheme

MIPs are hybrid MF schemes which invest mainly in debt (fixed income) products. These provide safety to the portfolio and allow for regular returns to be paid out. Some equity is added to this scheme to provide the "kicker" while taking some risks. MIPs come in different shapes and sizes, and equity exposure ranges from a low of nil or 5% to as high as 30%. Obviously, the risks and returns vary widely.

Recent Performance    

For the purposes of this article, I selected one scheme in this category which is among the better performers and has a mandate of going up to 25% in equity.


   During the past 12 months, this scheme has returned 24% (on the back of equity returns of 75% in the past year) as of the last week of April. To put into perspective, this scheme earned 23% returns in a three month period between March and June last year; and this may not be replicated some time soon.

The Devil Is In The Details    

The objective of investing in a predominantly debt product is safety and hence excessive risks must be avoided. On analyzing the returns from 2006 onwards, quarter on quarter, we find that this scheme has yielded negative returns in 3 out of 17 quarters. (Refer the table for a more detailed analysis of this scheme).


   What is clear from the table is that MIPs need to be invested in with a two-year time horizon at least if one does not want to take risks. Investing in schemes with a lower equity exposure would be another way to achieve that objective.

The Planner's Perspective

Hybrid schemes such as MIPs are a method of achieving asset allocation. As a financial planner, however, these schemes do not find favour because of the following reasons:
   
• Tax treatment for the equity component is disadvantageous as MIP is treated as a debt product (and equity gains are taxed at a lower rate or not at all currently)
   
• Expense ratios on these funds are higher than what one would pay if one could allocate the same funds into 75% debt and 25% equity schemes (as in this example)
   
• The nature of debt investment (duration of paper, which is one of the critical factors to ensure returns and reduce risks) and equity investment (whether large-cap or mid-cap) can change during the time that one is invested, thereby altering the risks that an investor would like to take.


   So tread with caution in this alluring world of MIPs.

 


Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now