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MIPs is a good starting point for the new investor
The equity rally has inspired many investors. Do you think it is a good idea to enter the markets now?
Retail investors tend to enter the markets at the peak and exit when it is at the bottom. When they burn their fingers, they vow to stay away from equities forever. We strongly advise that investors take the SIP route for investing in equities. The monthly investment not only inculcates discipline but also takes out the emotions from the investing decision. If they have a lump sum to invest, the money should be put in a debt fund. A systematic transfer plan can then be started to shift small amounts into an equity or balanced fund as per the risk appetite.
What is your advice to first-time investors?
They should take advantage of the expertise offered by mutual fund houses but not invest without understanding the product they are buying. Start with a fixed maturity plan (FMP), followed by debt fund, and then graduate to a hybrid fund. MIPs, which allocate around 85% to debt and only a small 15% to equities, can be a good stepping stone for a new investor. Once an investor gains comfort, he can move to equity funds.
The SBI Magnum MIP Floater has maintained an average 13.3% exposure to equities in the past five years. Do you think this is too conservative?
The fund has the mandate to invest a maximum 15% in equities. An average 13.3% exposure is in sync with the constraints. Very often, the right opportunity for investment in the right stock at the right price is not available, which leads to such aberrations vis-a-vis the mandate. It is not a reflection of a conservative allocation to equities.
Is an MIP taking too much risk if it allocates more than 20% of its corpus to equities?
MIPs are for the investors who have a low-risk appetite. To balance the risk appetite and optimisation of returns, we have imposed a cap of 15% on equities. Some other AMCs may put this at 20% or 25%. Such ceilings are a function of the assessment of the risk appetite of target investors. We also manage MIPs with a higher equity component.
The MIP category is very small, with just Rs 8,200 crore in 55 funds. Why are investors keeping away?
MIPs need to be showcased before the right segment of investors. As FMPS were available during all these years, MIP as a segment could not attract investors. With the improved flavour for long-term debt products, we expect improved inflows in MIPs.
Will the change in the tax rules for non-equity funds further weaken the inflows in MIPs?
Investors normally buy MIPs with a relatively longer time horizon. Though gains on withdrawals before three years will be taxed as short-term capital gains, I don't expect the flow to weaken as these funds will continue to offer better returns compared to bank deposits.
What are the basic things an investor should check before investing in an MIP fund?
Investors should look at the quality of debt papers in the portfolio, quality of equity portfolio and its composition in terms of allocation to asset classes. They should also consider the average portfolio yield and expense ratio.
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