A rather interesting trend is being observed at present, and it concerns the new bugbear among mutual funds, i.e. the monthly income plans.
MIPs' fall from grace has been chronicled to the minutest detail. With both the debt and equity markets running into rough weather such a situation was always on the cards.
Now the interesting part, investment advisors have been recommending their clients to offload their MIP investments and get invested in equity funds and balanced funds instead.
The rationale: equity markets are apparently at attractive levels, so it's an opportunity to make a smart investment. Another justification for this move is that moving into equity funds will insulate investors from the volatility presently experienced in the MIPs on account of the debt component.
MIPs generally maintain a 10-15% cap on their equity investments and invest the balance in debt instruments. Broadly speaking such investments would be suitable for individuals with a low-moderate risk appetite.
The same investors are now being asked to invest in equity funds i.e. expose themselves to an 100% equity investment. By doing so a basic tenet of investing i.e. investing as per one's risk appetite is being breached.
Now the capital erosion part. Let's see how the worst performers from both the categories i.e. diversified equity funds and MIPs have fared over the last 6 months.
This comparison despite being intrinsically flawed is being performed to test the hypothesis that investing in equities will help prevent capital erosion.
Equity funds: Top losers
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MIPs: Top losers
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Clearly the rationale that investing in equities will help curtail losses vis-à-vis investments in MIPs doesn't hold good. Also in most cases the real cause for concern with MIP investments has been erroneous information, investors were incorrectly sold as instruments which offer assured monthly returns.
MIPs like other market-linked instruments are prone to market vagaries and don't offer assured returns.
A factor which could be preying on your investment advisor's mind is the spate of equity fund IPOs (and the brokerage they could earn him) presently hitting the markets.
MIPs and equity funds as asset classes are as similar as chalk and cheese, but both are equally relevant even in the present scenario.
Depending on your risk-appetite and investment objectives they should find place in your portfolio; however treating one as a substitute would be an incorrect strategy.
If your investment advisor recommends that you can use the two interchangeably, rest assured he may not have your best interests at heart.