ONE of the aims of investors is should try to achieve is that there is a regular rate of return on a portion of their investments. There is an element of safety that is associated with such investments and at the same time they fulfill the requirement of a regular cash flow to meet various expenses. Due to this reason these are also given a greater importance in terms of selection. There is also the safety element that has high importance for the investors as several areas promise high returns but there is a lack of confidence of the investor in such routes that results in such instruments not finding a place in the portfolio of investors.
However, there is an option known as monthly income plans that are offered by mutual funds. Investors need to be aware of the various features of the MIPs since ignorance can give rise to tricky situations.
No guarantee: The first thing that every investor needs to concentrate on is the name of the funds that are known as monthly income plans. While the name suggests monthly income there is a significant point related to this that needs to be known is that the objective of the mutual fund is to provide a monthly income and there is no guarantee about this.
The monthly income is provided in the form of dividend out of the earnings of the fund. Recently there has been a regulation that prohibited funds from declaring dividends out of premium so this will impact the ability of the fund to manage dividends during times both good as well as bad. Since there is no guarantee investors should also plan accordingly and not rely too much on the fact that there will be a payout each month.
There have been enough instances when poor market conditions have led to the suspension of dividends for some months in many funds.
Nature of scheme: While there is no guarantee about the payout, the next question for investors would be as to whether there is a risk about the earnings from the fund. This could happen on account of the fact that these funds have a majority of the investments in debt instruments but there is a small part also in equities.
The overwhelming percentage is in debt and this is the part that provides the stability to the whole portfolio. The equity part is expected to provide the kicker in terms of returns when the equity markets are doing well but this is unreliable. There is also a large fluctuation that often happens in equities and this can make the entire net asset value of the funds quite volatile. The impact of the equity portion thus becomes quite high and hence it wields a significant influence that needs to be taken into account.
Higher risk: One factor that investors should not forget is that even within the category of monthly income plans there can be a distribution into two categories of funds.
The difference can be based upon the risk that is taken by the funds. The funds can be separated as low risk and moderate risk funds because of the extent of the equity holdings that these funds have in their portfolio. There are several funds within this category that restrict their equity holdings to around 10-11 per cent while another category has equity holdings that go up to 20-23 per cent. The change in the holdings can make a significant impact as far as the individual investor is concerned.
During good times there will definitely be a better performance as far as the funds with the higher equity exposure is considered. The important part here is that the better performance might not be on account of anything but the fact that the composition of the portfolio enables such a situation.
This is important because investors might think that several funds are performing better consistently even though there might be a situ ation wherein the comparisons might not be correct.
The risk is that when the market conditions are bad the negative impact could be tough to digest.
Post office monthly income scheme: At the end of the day there has to be a proper allocation of the funds that are available with an investor. This would mean a situation where there is competition between different avenues for the same funds and the post office offers a monthly income scheme where the returns are 8 per cent per annum with a 5 per cent bonus at the time of maturity. If one wants to ensure that there is a steady return without any disturbance then the post office plan will be the first selection. The restriction here is that only Rs 4.5 lakh per person can be invested in the route so if a person has a higher amount then they need to look elsewhere.
For all those who are not averse to a bumpy rise they can look towards the monthly income plans of the mutual funds as these will provide the necessary upside though the returns might not be consistent. This is important and the individual will need to be alert about the position as they go about the decision-making activity.
