An investment option for safety seeking investors

Article in Mid-day, Mumbai on 3rd August

http://epaper.gujaratimidday.com//epaperpdf/gmd/03082015/03082015-md-gm-11.pdf


The English translation is as below:

MIP – Monthly Income Plan – do not go by the name, there may not be monthly income, after all.

Among the various mutual fund products, there are some that invest in more than one asset categories. These schemes are known as hybrid schemes. One such hybrid category product is known as MIP or Monthly Income Plan. These schemes are predominantly debt funds with marginal allocation to equity. Whereas the debt component provides stability, equity has the potential to boost up the returns.

The objective of combining the two assets is to get the best out of the two as mentioned above. However, one needs to be more careful while considering investing in MIPs.

While in some of earlier articles we talked about the debt funds and equity funds separately, in a hybrid fund, one must check both the debt and equity portfolios.

The equity portfolio could be large-cap or mid-cap or multi-cap; concentrated in few stocks or well diversified. Normally the equity portfolio of MIP is diversified across sectors and market capitalization (or size of companies).

The debt portfolio could have different maturity papers (higher or lower interest rate risk); higher or lower credit quality of the debt papers. In most cases, the average maturity of the portfolio is not long, but not too short, either. Thus, the interest rate risk may not be too high. At the same time, even the credit profile of the portfolio is good in majority cases.

Another important thing one must check is the allocation between equity and debt. One could see many variations here. The equity component could be as low as 0% to as high as 35%. The debt component on the other hand would typically be more than 65%, and could go up to 100% of the portfolio. Higher allocation to equity increases the risk of price fluctuation. At the same time, the same has the potential to increase long term returns of the scheme.

While talking about the allocation between equity and debt, some schemes try tt maintain constant allocation between the two, whereas in some cases, the fund manager may want to have the flexibility to change the percentage allocation based on one’s view on the markets.

Having said that, let us go back to the statement made in the opening paragraph. Due to the equity component, and sometimes due to the debt component, too, the NAV of the fund may fluctuate such that no surplus may be available for payment of monthly dividends, occasionally. In such cases, the scheme may skip dividends for some months.

This does not mean the scheme is bad. It only means that some time the monthly dividend may not be available, especially in the initial period after the launch. However, once the scheme has built reserves, it has the potential to pay regular dividends.

Overall, an MIP is a good investment option for the conservative investors since:

1.     It is a stable portfolio

2.     The long term returns are more tax-efficient

3.     It has potential to deliver higher return than traditional fixed income products without significantly increasing the risks.

Make sure you make a wise choice.

Happy investing.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.