In rising stock markets, diversified equity funds emerge as top-of-the-mind investments, while hybrids like balanced funds and MIPs (monthly income plan) are relegated to the sidelines. That is most unfortunate, because investors are missing out on a very critical cog in their portfolio by shutting out hybrid funds completely.
Hybrid funds (powered by their flexibility to invest across asset classes) can add immense value to the investor's portfolio (especially during the down turn). While the role of balanced funds in the investor's portfolio has been well-documented, it's time for investors to recognise the value MIPs can add to his portfolio.
What are MIPs?
MIPs invest predominantly in debt instruments with a small portion of assets allocated to equities. The equity component provides MIPs with just the edge it needs to outperform conventional debt funds. The equity component usually varies between 5 per cent-30 per cent of assets.
A noteworthy feature about MIPs is the wide range of options available to investors. MIPs can be segmented based on their equity allocations; for example conservative MIPs invest 5 per cent-15 per cent of their corpus in equities, while moderate MIPs invest 15 per cent-20 per cent of their corpus in equities and the aggressive ones invest 20 per cent -30 per cent of their corpus in equities (the three categories should not be taken as an industry standard, they have been defined for a better understanding of how MIPs are structured).
Effectively, MIPs provide investors with the opportunity to invest in line with their risk appetites.
Why invest in MIPs?
1) Often we observe investors with a low to moderate risk appetite investing in diversified equity funds or even balanced funds in order to make the most of rising markets. The mismatch between the investor's risk appetite and his choice of investment is evident.
MIPs with a lower equity component (less than 20 per cent of assets) can prove ideal for such investors, provided they have a minimum time frame of 18-24 months. The equity component acts as a 'kicker' and provides MIPs with an edge over conventional debt funds.
Since the equity component is capped, this ensures that the MIP does not take on more risk than it should. While investors could witness intermittent volatility in an MIP (possibly even a loss), over time they should be better off than investors in debt funds.
2) When equity markets are in the midst of a rally, a lot of investors are invested mainly in equities/equity-oriented funds. As a result, they end up with equity-heavy portfolios with little or no allocation to assets like debt/fixed income. When equity markets turn volatile, investors are often caught wrong-footed with their bloated equity portfolios. In such a market scenario, the debt component of the MIP can stabilise their portfolios.
Our advice to investors
Don't restrict your investment options to one asset class; instead look at building a portfolio that comprises of various assets including equities, debt, cash and gold. The allocation to each asset will be based on the investor's risk profile and investment objectives.
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