Invest in MIPs for 3-4 years

My broker has advised me to invest a lumpsum amount in a Monthly Income Plan (MIP). In the current scenario where interest rates are expected to rise, should I do so? Also, should I invest in more than one MIP for diversification?

-Ajay

MIPs are conservatively positioned funds. They should not be misunderstood as plans giving monthly income. They typically invest 80-90 per cent of their assets in fixed income and the rest in equities.

Investing a lumpsum in MIPs is not a bad idea. Due to their small exposure to equities, this will not amount to a huge risk. The rising interest rates are expected to have a negative impact on fixed income instruments' pricing. But if the equities gain, they can offset these losses.

You should be prepared for intermittent declines. However, over three to four years, their returns can beat inflation, and with a relatively stable performance. You may pick from the following funds: DBS Chola MIP, Reliance MIP, UTI Monthly Income Scheme, HDFC MIP Long-term. Diversification is important here as well. Spread your investment across two to three funds.

Should I redeem my investments from Religare AGILE Fund, where I had invested during the New Fund Offer (NFO)? What should I opt for between the growth or dividend option under equity schemes?

-Anand Kodiyal

Religare AGILE invests in stocks of companies selected on the basis of a mathematical model. It follows a passive approach to investing. It has not yet proved its investing style.

You may consider moving to other proven large-cap funds such as DSPBR Equity, HDFC Top 200, DWS Alpha Equity, Fidelity Equity, HDFC Growth and ICICI Prudential Dynamic.

Coming to choosing the right option, in mutual funds, dividends are a part of the total investment that is distributed to the unit holders. This distribution is then deducted from the NAV of the units and is completely tax-free. In the dividend reinvestment option, these dividends are again invested in the fund at the new NAV, instead of paying off in cash.

Regardless of the option chosen, a fund's returns remain the same. However, differences are evident when taxation is taken into consideration. In case of redemptions within a year (short-term), dividend declarations which are tax free will reduce the capital gains on the original units purchased. Hence, the post-tax returns under the dividend option will be better than the growth option in the short-term. But after a year (long-term), when the gains from original units will also be tax-free, this difference will disappear.

Since equities are for the long term, mid-term withdrawals or dividend payouts are not suggested. The present tax laws make the dividend reinvestment option more favourable. But at the time of withdrawal, if dividends have been declared within the preceding one year, the gains on new units will be subject to short-term capital gains, even if the original investment has already completed one year and has become tax free.

Value Research