It's not 'the end' for MIPs

The tide has turned rather quickly for Monthly Income Plans. MIPs have gone from being the most preferred option for investors in 2003 to becoming probably the most slammed one in present times.

So what went wrong with this wonder product? Let's find out.

Monthly income plans essentially plug the gap between conventional balanced funds (which invest between 60%-70% of their corpus in equities) and debt funds (which invest their entire corpus in government securities, bonds etc).

For a risk-averse investor who wishes to better the returns offered by conventional fixed income instruments and yet retain liquidity, MIPs are the best fit.

Secondly they also offer a monthly dividend option, whereby investors are entitled to a monthly dividend depending on the availability of a disposable surplus.

MIPs have borne the brunt of falling markets in the recent past. Most schemes have recorded negative growths and the monthly dividends have been skipped as well. Does all this make MIPs a poor investment option and is it time to exit them? Not necessarily!

The fallen ones

MIP Schemes	NAV (Rs)	1-Wk	1-Mth	6-Mth	Incep.
HDFC MIP LTP G	10.07	-0.68%	-2.87%	-0.68%	-0.68%
HSBC MIP SAVINGS G	9.82	-0.54%	-2.67%	NA	-1.58%
ALLIANCE MIP G	19.56	-0.73%	-2.54%	-0.03%	14.30%
DEUTSCHE MIP PLAN A G	9.88	-0.35%	-2.07%	NA	-0.81%
HSBC MIP REGULAR G	9.89	-0.41%	-1.97%	NA	-1.16%

(Data sourced from Credence Analytics.)
(NAV data as on June 23, 2004, Growth over 1-Yr is compounded annualised)

Remember MIPs declare dividends depending on the availability of a distributable surplus i.e. they don't guarantee monthly returns. The problem arises if investors believe (or are led to believe) that they are investing in an assured return product.

Monthly income plans as a product should not be criticised if the investment decision was based on incorrect understanding of the product or an investment advisor's flawed advice.

Drawing comparisons between schemes like the Post Office Monthly Income Scheme (POMIS) and MIPs offered by mutual fund schemes is like comparing oranges and apples.

While a POMIS can offer assured returns month-on-month, it is handicapped by

its inability to counter inflation, something a MIP is equipped to offer due to its equity component. Further top performing MIPs over a longer horizon like a 3-Yr period, have comfortably outperformed most assured return schemes.

MIPs: The long term perspective

MIP Schemes	NAV (Rs)	1-Wk	1-Mth	1-Yr	3-Yr	Incep.
ALLIANCE MIP G	19.56	-0.73%	-2.54%	12.29%	13.08%	14.30%
BIRLA MIP C G	15.17	-0.27%	-1.43%	10.09%	12.50%	12.34%
FT INDIA MIP G	15.62	-0.32%	-1.37%	13.13%	12.38%	12.79%
TEMPLETON MIP G	15.49	-0.33%	-1.47%	11.26%	11.45%	10.59%
PRU ICICI MIP C	14.32	-0.20%	-0.91%	8.84%	9.73%	10.19%

(Data sourced from Credence Analytics.)
(NAV data as on June 23, 2004, Growth over 1-Yr is compounded annualised)

Within the gamut of MIPs, investors have a wide variety to choose from. Monthly income plans are available with equity holdings which range from 5 per cent to 30 per cent of the entire corpus. Investors should select a scheme that best suits their risk appetite.

While schemes with a higher equity component are likely to suffer more when markets fall, they are also better equipped to offer higher returns over a longer period of time (about 3 years).

How should investors treat their MIP investments going forward?

1. Existing investors who are invested in aggressive MIPs (those with equity exposure in excess of 10%) with a view to getting monthly dividends need to reconsider their investments. With equity markets running into rough weather, the frequency of dividends may fluctuate sharply at least in the immediate future. However, the view that aggressive MIPs will outperform the regular MIPs in terms of generating returns (or paying out dividends) over a 2- to 3-year period, remains unchanged.
   
2. We maintain that investors should probably select a quarterly dividend option to enable the fund manager to declare a dividend consistently, which may not be possible month on month in a market like this one.
   
3. If you have alternate revenue sources, stay invested in MIPs. Use the downswings in the market to average out the cost of your holdings. Over the longer horizon, MIPs will continue to be a smart choice.

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