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Mutual Funds: Monthly Income Plans (MIPs)

Monthly income plans are traditionally popular but volatile due to inherent risk in equities

AS OF the quarter-ended March 31 this year, with an aggregate average quarterly corpus of about Rs 29,000 crore, MIPs made up for a little over 10 per cent of all debt funds (excluding liquid funds) and around 20 per cent of all open-ended debt funds (excluding liquid funds).

Monthly income plans, or MIPs as they are popularly called, have been an old favourite of many retail investors who, besides the characteristics and track record of MIPs, like the sound of the word `monthly income' which denotes a steady flow of money on their investments.

Some investors could confuse an MIP with a SIP but the two are completely different. SIPs refer to the feature of systematic investment plan that asset management companies (AMCs) offer investors, mostly in equity funds.

A SIP is not a separate scheme nor is it one of different options with the same scheme such as dividend and growth. It is simply a feature which enables investors to automatically make new subscriptions to a particular individual scheme at a fixed pre-determined interval, usually monthly.

MIPs, on the other hand, are funds or schemes in their own right. MIPs are usually categorised as debt funds but they are not pure debt funds as, in their investment objectives, they retain the leeway to invest a little bit in equities. This little bit can go up to as much as 20 per cent of the total corpus in some cases. Despite an equity component in their portfolio, MIPs are not balanced funds since balanced funds debt-equity ratio would not be too far way from 50:50.

As per data from Capitaline NAV India, there are 50-odd MIPs across AMCs.


Two of them, HDFC Monthly Income Plan-Long Term Plan and Reliance Monthly Income Plan, had large average assets under management (AAUM), Rs 9,902 crore and Rs 8,393 crore respectively as of March this year, putting them among the largest 10 funds in the entire mutual fund industry including the liquid funds which attract heavy institutional and corporate treasury investments.

Despite their popularity among retail investors, MIPs are not exactly conservative with their returns.


Their attractiveness lies in the kicker returns promised out of the equity exposure.
But this is exactly what makes the performance of MIPs uncertain belying the assurance emanating from the term `monthly income' in their nomenclature.

An analysis by of one-year, three-year and five-year returns offered by the monthly dividend payout option of about 30 MIPs, having a minimum track record of five years, reveals a wide disparity between the best, and the worst, performer (see table). The highest average return across the three time periods came from Reliance MIP with a compound annual growth rate (CAGR) of 10.94 per cent in five years, 14,37 per cent in three years and 6.48 per cent in one year. Its last available equity exposure was 19.61 per cent of total AUM.

The lowest average return came from Sundaram MIP-Moderate which posted a 5-year CAGR of 3.92 per cent, 3-year CAGR of 3.60 per cent and one-year CAGR of 0.57 per cent. Its latest equity exposure was 15.21 per cent.

In the 30 MIPs, equity exposures varied widely but there was no fixed pattern of a very high, or a very low, one leading to higher, or lower, returns. For instance, Birla Sun Life MIP II Wealth 25, had the highest latest equity exposure of 24.78 per cent but ranked 15th in one-year CAGR returns. The one with the lowest latest equity exposure was Templeton India Low Duration Fund with a zero per cent exposure to equities and it fared better in one-year CAGR returns ranking third out of 30 MIP funds. But in the average of CAGRs of the three periods it ranked ninth. MIP fund managers are open to changing their equity exposure levels as frequently as they desire depending on their views. This subjectivity, and the inherent risk in equities, can make MIPs deliver much better than pure debt funds when the markets are rising and much worse when the markets are sliding or stagnant.

Investors need to be, therefore, cautious before jumping in the MIP bandwagon.

 

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