Have you always been a little wary of buying into equities and, therefore, always opted for staid debt schemes? And are you feeling a little dizzy, now that the Sensex has touched 7850?
If you want a taste of equities but are still apprehensive about going the whole way, try out a monthly income plan. Don't be mislead by the name -- not all MIP schemes actually give you a monthly dividend.
In that sense the name is a misnomer. But since these schemes have some exposure to equities (between 5 per cent and 25 per cent), they give reasonably good returns. To give you an idea, in the past one year, the average category return has been 11.59 per cent with the best scheme giving you as much as 17.5 per cent.
In comparison, the best performing schemes in the debt category such as short-term debt funds have given just over 5 per cent returns on an average. Liquids and floaters haven't done very much better - the average 12-month return for these categories is also between 5 per cent and 5.5 per cent.
Obviously, the equity portion of the portfolio has driven returns in the past one year with the markets having been buoyant. But, looking ahead, even if the stocks portfolio (say 20 per cent) earns between 14 per cent and 15 per cent, while debt investments yield between 6.5 per cent and 7 per cent, the weighted average return of the portfolio would be in the region of 9 per cent.
Interest rates have moved up over the past two years and five-year AAA corporate bonds now yield between 7 per cent and 7.5 per cent. There's plenty of good corporate paper available in the market though the pricing, at times, may be a little fine.
On the other hand, though the stock market is at an all-time high, it has been seen that equities do give decent returns in the long run and an average return of 14-15 per cent annually, is not unthinkable. Returns from MIPs, therefore, are likely to be superior to those on plain-vanilla bond funds.
At the same time, the high component of debt protects you from a severe erosion of capital in the event of a sharp fall in the market. For instance, if the equities portfolio falls by about 20 per cent, the 5 per cent dividend that you would get on the debt portion would ensure that over 12 to 18 months you made up for the loss.
Says a fund manager, "In the longer term the accrual of interest on the debt side, should make up for the loss, if any, on equities." Says Binay Chandgothia, deputy CIO, Principal PNB AMC,"With a little bit of additional risk, one can increase returns significantly. At the same time an individual is spared the trouble of maintaining an equities portfolio."
Says A Balasubramanian, country head, business development, Birla Mutual Fund, "MIPs can be a good option for those who want to balance equity with debt."
Depending on your risk appetite, you can decide what kind of equity exposure you want--whether its 5, 10 or 15 per cent. The average investor opts for 15 per cent.
Birla Mutual has not missed out on its monthly dividend payment and has paid out around 8.4 per cent (annualised). According to Balasubramanian, most of the time the dividend is paid out of the returns though at times it has been paid out of the reserves.
Fund managers do not churn the debt portfolio too much. Says Samir Kulkarni, head fixed income, Templeton, "We invest fairly defensively in the fixed income portion which is mainly in corproate paper and government securities. The kicker comes from the equities and the stocks are normally those that one would pick for a diversified growth fund."
Adds Ritesh Jain, fund manager, Kotak AMC, "We do not normally hold paper of maturities above one year one-year maturity) and we try to ensure that the current yield is around 6-6.25 per cent. In that sense, there is little downside risk because we hold the paper to maturity." Fund managers prefer parking the corpus in commercial paper (CP) and T-bills.
Investor should hold on for at least a year. Says Chandgothia, "Since around 20 per cent of the allocation is to equities which can be suffer in the short term, but give a good return over a longer term, it's better to stay invested for at least 12-18 months."
As Dheeraj Singh, head, fixed income, Sundaram Mutual, says, "The return expectations should not to be too high since most of the money is parked in fixed income instruments but an MIP can be tried out by someone who is generally risk averse but is willing to experiment a little."
MIPs generally do not attract entry loads but several funds choose to impose an exit loads, especially if there is a withdrawal before six months. The load could be as high as 1 per cent sometimes so it doesn't make sense to quit before a certain time period.