When the 'launch an MIP' rally was at its peak in 2003, fund houses promoted Monthly Income Plans as products which combined the 'stability of debt and power of equities.'
Come 2004, debt markets experienced intense volatility, and the 70-80 per cent debt component provided MIPs anything but stability. Factors ranging from expectancy of hardening of interest rates to rising inflation levels all contributed to this phenomenon.
Floating rate funds also came into the limelight around the same time, powered by their ability to counter rising rates. At a time when conventional long-term bond funds were languishing in negative terrain, floating rate funds proved to be the saving grace.
So do fund managers utilise this facility while structuring their MIPs' debt component? Let's find out.
We decided to pick better performing MIPs over a three-month period (when debt markets have been at their turbulent best) and analyse the role played by floating rate instruments in their debt component.
Leading Monthly Income Plans (MIPs)
| Monthly Income Plans | NAV (Rs) | 1-Mth | 3-Mth | Debt Ratio | Equity Ratio |
| HDFC MIP LTP | 10.65 | 0.9% | 3.6% | 80.8% | 19.2% |
| DSP-ML SAVING PLUS AGG. | 10.43 | 1.1% | 3.4% | 87.3% | 12.7% |
| BIRLA MIP II WEALTH 25 PLAN | 10.26 | 0.7% | 3.3% | 76.9% | 23.1% |
| CHOLA MIP | 11.19 | 0.9% | 3.2% | 86.3% | 13.7% |
| FT INDIA MIP | 16.30 | 0.7% | 3.2% | 80.0% | 20.0% |
The results of our study are interesting to say the least. While the importance of floating rate instruments seems to have been recognised by all fund managers, they seem to be utilising it in varying degrees.
On the one hand, we have funds, like HDFC MIP, that hold only a nominal part of their corpus in floating rate instruments; while others like DSP ML Savings Plus display a higher degree of reliance. As on September 30, 2004, DSP ML Savings Plus held more than a third of its entire corpus in floating rate instruments.
Analyse portfolios of mutual fund schemes
It may be incorrect to draw a conclusion that the presence of floating rate paper is responsible for the fund's smart performance since the equity component (albeit a minor one) plays a significant role.
However, the presence of floating rate instruments speaks volumes about their utility and yet again underscores the role they play in capital preservation.
Here's a tip for investors. The next time you decide to get invested in an MIP, take a look at its debt component. It will reveal how equipped your scheme is to deal with volatility and preserve capital as well.
