Want to invest in a Monthly Income Plan?

It has been a double whammy for the Monthly Income Plans, thanks to the falling returns from debt instruments and the crash in the stock market.

Here we look at this form of investment and see if it is still worthwhile.

Who needs an MIP?

Before we proceed, we have to point out that this category is badly misnamed. The funds may try but are not obliged to give you a regular monthly income.

A typical MIP invests a bulk of its assets in debt, and a small portion in equity to earn that something extra.

It is a great option if you are a conservative investor. That means:

- You want to earn a marginally better return than had you invested only in debt.

- Unwilling to enter the stock markets, either directly or via a diversified equity fund.

- You don't need the hassle of continuously monitoring or being involvement in your investments.

The logic is clear. Investors who want to keep their investments simple are normally conservative and prefer to invest where they can get a fixed income. Since fixed income returns have been on the way down over the last few years, such investors will need something else that will let their returns rise at least a few meaningful points above the inflation rate. Hence, they need to consider a small investment in equity.

Which is where MIPs come in -- they focus on stability and not on high returns.

Unfortunately, in the current equity boom, most MIPs began to put higher amounts in equity. An average MIP has just 5.23% of its portfolio allocated to equity four years ago. This jumped to 14.53% in May 2005 and, since then, has remained above 14%.

In 2005, the return of an average MIP rose by a decent 9.18%. Till May 10, 2006, they were up 5.86%. Then came the turnaround and the real risk that comes with getting too confident when it comes to equity. In a matter of a few weeks, the stock market's crash wiped out returns and the year to date average return of MIPs as on June 8, 2006 was down to just 1.76% (from around 6% not too long ago).

Of the 42 funds in the category, 34 registered their worst monthly performance between May 10, 2006 and June 7, 2006. Here are a few of them.

If the slump continues, many MIPs will not even be able to match the return of debt funds while some may lose money. This crash has already demonstrated this. Year to date return of an MIP (1.76% as on June 8) is much below the return of a cash fund (2.56%).

MIPs have a huge challenge ahead. There is no sign of any comeback in the debt market. Now, equities too have started to misbehave. Any adventurism may lead to a real long-term losses here. Therefore, MIPs will have to find a middle path, shun investing aggressively and reduce their investment in equity.

For investors, the key is to have patience and stay invested for the long term.

If you are an ultra-conservative investor who still wants the low equity exposure, then opt for one of these funds but choose  carefully.

Birla Sun Life MIP

Though it has toned down some aggression over the years, it has close to 14% allocation to equity. Within equity, it has a preference for mid- and small-cap stocks.

DSPML Savings Plus Moderate

Equity is the key to this fund's success and, since they have taken a beating, this one has suffered.

Though the equity investment could go up to 20% of the portfolio, the investment is only restricted to the top 100 companies by market capitalisation. Hence, it has shown lower volatility.

FT India MIP

With nearly one-fifth of the portfolio in equity, this one will test your patience. This makes the fund volatile and risky for conservative investors. But those willing to stay invested for the long-term should have no problem here.

Though hard hit during the recent crash, as on June 6, 2006, it boasted of the best three-year and five-year returns in the MIP category.

HDFC MIP Long-term

A typical risk averse MIP investor will not find this fund palatable. Those willing to stay invested for a longer period and able to withstand volatility are likely to be rewarded.

In its two calendar years of existence, the fund has earned huge returns but the risk is above average.

Prudential ICICI MIP

Encouraged by huge success with its equity portfolio, the fund parked 15.4% of its assets in stocks in April, with a quarter of that in small-cap stocks. As a result, it was one of the worst sufferers of the recent crash. Having said that, it's year-to-date return (as on June 8) of 2.73% is still better than the category average of 1.76%.