How are equity savings funds different from monthly income plans?

In some of our earlier articles, we have covered various hybrid funds. One such category was the MIP or the Monthly Income Plan – a hybrid fund that invests predominantly in debt securities and marginally in equity. Such a combination offers stable, but potentially higher than debt fund returns over long periods.

In the last few years, a new variant has been introduced that works very similar to an MIP, but comes with a small difference. These products are known as the “equity savings funds”, popularly.

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The English translation of the article is as under:

In some of our earlier articles, we have covered various hybrid funds. One such category was the MIP or the Monthly Income Plan – a hybrid fund that invests predominantly in debt securities and marginally in equity. Such a combination offers stable, but potentially higher than debt fund returns over long periods.

In the last few years, a new variant has been introduced that works very similar to an MIP, but comes with a small difference. These products are known as the “equity savings funds”, popularly.

These funds are a hybrid of three portfolios, instead of two in case of MIP. The three parts of an equity savings fund are: equity portion, debt portion and arbitrage portion. The exposure to the debt securities is kept below 35% in these cases, to ensure equity exposure (combined between pure equity and through arbitrage positions) at all times is above 65%. As we discussed in case of the arbitrage funds, keeping equity exposure above 65% gives these funds the status of equity-oriented funds for the purpose of income tax. Due to that, the dividends from these funds are tax-exempt in the hands of the investor as well as exempt from dividend distribution tax. The short term capital gains are taxable @ 15%, if the gains are booked within one year. If the holding period is longer than one year, the capital gains are qualified as long term and hence such capital gains are tax-exempt.

This offers a wonderful investment option for the conservative investor – stable portfolio returns with high tax-efficiency.

However, one must keep certain points in mind about this portfolio.

1.     This is not a debt fund, but a hybrid fund, having exposure to equity

2.     The fund has net positive exposure to equity, unlike arbitrage funds, where open equity exposure is covered by derivatives. Such a net positive equity exposure means the fund can exhibit higher volatility than arbitrage funds.

3.     The net equity exposure may be higher than in case of MIP, such schemes could deliver higher long term returns with high volatility in the short term. The risk is higher.

Given this, it is advisable to consider these funds only if you have money to be invested for medium to long term periods. These funds are not suitable for short term investments. Given the tax advantages, these funds could be a better option in comparison to MIPs.

- Amit Trivedi

Chat transcript - 14th Dec, 2015

Below please find link to the transcript of my chat session on www.moneycontrol.com on 14th Dec, 2015

Equity investments simplified

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.