Most monthly income plans (MIPs) have had a rough time over the past 6 months. Rough weather in equity markets (who can forget Bloody Monday on May 17) combined with volatility in bond markets from inflationary concerns took the wind out of MIPs' sails.
However, one MIP that continues to stand out despite the setbacks is HDFC Monthly Income Plan Short Term Plan (STP).
The HDFC Monthly Income Plan initial public offering was launched in December 2003. The fund had two options -- HDFC MIP Long Term Plan (25% equity cap) and HDFC MIP Short Term Plan (15% equity cap). Expectedly, the long term plan got disproportionate investor attention what with equity markets ruling at over 6,000 levels.
A lot of investors opted for HDFC MIP LTP (25% equity cap) without being able to appreciate the higher risk involved. Investors who were looking for regular dividend payouts believed that the higher equity component would enable them to receive higher and regular dividends. These investors were in for a rude shock when the double whammy from equity and debt markets not only robbed them of dividends but also eroded the capital.
IPOs like HDFC MIP were adversely impacted because unlike the established MIPs they were not able to build reserves to declare dividends in volatile times. Investors were very confused what with all and sundry announcing obituaries for the MIP and advising investors to shift to equities.
A struggle to survive
| Monthly Income Plan | NAV (Rs) | 1-Wk | 1-Mth | 6-Mth |
| ING VYSYA MIP A G | 10.29 | 0.12% | 0.31% | 2.27% |
| DEUTSCHE MIP PLAN B G | 10.26 | 0.79% | 0.94% | 2.03% |
| HSBC MIP SAVINGS G | 10.19 | 1.26% | 1.25% | 1.49% |
| RELIANCE MIP G | 10.17 | 0.69% | 0.80% | 1.41% |
| HDFC MIP STP G | 10.42 | 1.02% | 0.98% | 1.37% |
| FT INDIA MIP G | 16.08 | 1.00% | 1.26% | 1.32% |
| PRU ICICI MIP C | 14.63 | 0.76% | 0.84% | 1.26% |
| SUNDARAM MIP G | 10.15 | 0.74% | 0.83% | 1.25% |
| DSP ML SAVINGS MODERATE G | 11.86 | 0.60% | 0.60% | 1.13% |
| HSBC MIP REGULAR G | 10.14 | 0.96% | 0.92% | 1.04% |
Among the recent slew of MIPs, one that has done reasonably well to tide over the equity and debt market volatility is HDFC MIP Short Term Plan. The fund has a 15% cap on equity investments and as on July 31, 2004 it has 12.9% in equities.
It had an average maturity of 1.61 years, which is 'relatively safe' given the volatility that debt markets have been seeing lately. The conservative fund management style proved to be a winner when a lot of aggressive MIPs were getting cornered on the debt and equity side.
HDFC MIP's own long-term plan has fared dismally over the last 6-months (up 0.85%) and a higher equity component (19.3%) did nothing to better its fortunes.
Investors need to look at some key factors before investing in an MIP and the cap on equity component is one of them. A larger cap on equity is not necessarily a virtue, at least not in times like this. In fact, if you have low to moderate risk appetite and are looking at consistency in returns, your objective will be better served by a conservative MIP with a 10-15% equity cap.
Even if you want to look at aggressive MIPs (25-30% equity), look at them from the perspective of a balanced fund investor i.e. invest for the long term (at least 3 years) and be prepared for some volatility in the interim period.