| Apart from being in the limelight owing to a score of high profile launches, monthly income plans (MIPs) have been gaining in popularity owing to a host of reasons such as regular income, decent returns and risk-controlled exposure to equities.
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| In terms of returns alone, MIPs have been able to outscore debt funds. As on January 6, 2003, the average 1-year returns offered by 12 MIPs was over 11 per cent, while that of income funds was a modest 7.5 per cent since interest rates are remaining stagnant.
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| The top performing MIPs in this period were Alliance MIP (18.5 per cent), FT India MIP (17.5 per cent) and Tata MIP (16.4 per cent).
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| But what exactly are the MIPs? Are they safe? Do they always give regular monthly income? How does one select the right MIP? We attempt to answer these questions that are now in the minds of most investors.
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| A MIP is basically a hybrid scheme which is largely invested into debt instruments (to the tune of 80-90 per cent), while there is a small or marginal (10-20 per cent) exposure to equities.
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| While debt provides stability, equity attempts to capture the upside of the market. In a bearish market, however, the fund manager has the option to go fully into debt. In a bull market, like now, the equity exposure can go up to 25 per cent of the portfolio.
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| MIPs as a category are thus riskier than pure debt funds, but they hold the potential of enhanced returns, through the equity component, provided the market is favourable and the fund manager’s calls on equities are correct.
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| As far as safety is concerned, MIPs are not for those investors who prefer to play safe and opt for the 8 per cent assured returns offered by the Post Office Monthly Income Schemes.
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| So if you desire the extra returns, it goes without saying that you need to have the tolerance of the higher risk that comes with the equities.
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| Also MIPs come with a higher liquidity than Post Office or other assured return plans which normally have a lock-in of 5 to 6 years.
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| There were, however, a few closed ended MIPs in the past, but following the UTI debacle, no fund house has launched a close ended MIP in the recent past.
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| Before investing in any MIP, it is advisable for an investor to look into the past track records of the fund in terms of returns and regularity of dividend payouts.
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| This is particularly true of bearish markets where we saw many prominent funds skipping on monthly dividend payouts.
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| Let us also point out that the monthly income payout is not guaranteed and is only subject to the distributable surplus that the fund has. And as in any other mutual fund, past performance is no guarantee for future returns.
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| Ideally, the debt portion should be as conservative as possible with the credit risk free government of India papers and highly rated corporate debt.
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| Equity, on the other hand, should contain a judicious pick of carefully chosen, well known, preferably large capitalisation stocks, so that the downside risk for such a small portfolio is as low as possible.
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| A point of vital importance is the percentage allocation to equities. If you are not comfortable with the idea of an equity exposure of above 10 per cent, please do not invest in a fund whose portfolio shows an allocation of 15-20 per cent in equities. |
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