Mixing It Right

These are difficult times for investors who are looking to invest in options that can provide steady returns and are less risky than pure equity funds. With the medium-term debt as well as gilt funds experiencing very high level of volatility of late, the options for long-term investors have got restricted to debt funds such as flexi debt or dynamic bond funds that manage their portfolios very actively. Here too, it is vital to understand the strategy of the fund before taking the plunge. However, for those investors who do not mind a small exposure to equities in order to enhance the returns, Monthly Income Plans (MIPs) can be a good option as the equity portion in their portfolios can be expected to provide an edge over pure debt funds.

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Monthly Income Plans (MIPs) have the dual objective of generating regular income as well as provide growth of capital. To achieve these dual objectives, the amount mobilised is generally invested in financial instruments like debt, money market, equity and equity-oriented instruments. In other words, MIPs are basically ultra-conservative balanced funds wherein the debt portfolio provides steady returns and the equity portfolio enhances the chance of improving overall returns. This asset mix, over a period of time, has the potential to provide returns that are more attractive than other options like fixed deposits and debt/gilt funds. At the same time, there is a possibility of fluctuations in the returns in the short-term due to certain market factors.

As is evident from the table, MIPs have outperformed the debt/gilt funds over all the time periods. However, this has been possible mainly because of the phenomenal returns given by the equity markets over the last few months. The situation can change for a time period that witnesses an increased level of volatility in the stock market. The general impression about MIPs is that these are best suited for investors who require regular income. No doubt, catering to regular income needs of investors is a major objective of these schemes. At the same time, MIPs have the characteristics of providing multiple solutions. For example, for an investor who wishes to build his capital over a period of time, the growth option under a MIP provides the most ideal vehicle.[PAGE BREAK]

The key, however, is to select the right fund in terms of exposure to equity. There are different variants of MIPs. For example, there are MIPs that have higher exposure to equity, say around 25-30 per-cent. While these aggressive MIPs have the potential to provide higher returns over a longer period of time, the level of exposure to equity makes them more risky. A conservative investor will do well to start investing in those MIPs that have capped the equity exposure to 10-15 per cent.

It is important to remember that an investment in equity, however small, requires long-term commitment and hence any volatility in the short-term should not be a cause for worry. In fact, there have been instances in the past when some of the MIPs have either delivered lower or negative returns over certain time periods.  It is quite likely that we may witness this scenario in the future again.

Therefore, before allocating money to these funds, one has to consider one’s risk-taking capacity and the need to get the enhanced returns. So, if you are an investor who is looking to include equities in your portfolio in a small way and have the risk appetite to handle the volatility bouts from to time, MIPs can be an ideal option for you. Moreover, MIPs can prepare you for the vagaries of the equity markets which pose the ultimate challenge to investors’ patience and perseverance.