Monthly Income Plans

Hybrid funds invest in a mix of both equity and debt instruments. These hybrid funds are further classified as equity oriented hybrid funds and debt oriented hybrid funds on the basis of the proportion of its allocation into equity and debt.

Monthly Income Plans (MIPs) are debt oriented hybrid funds with a small equity component. They work with the explicit objective of generating regular income for its investors by outperforming pure debt investments with the help of an ‘equity push’. MIPs generally invest 0% to 25% of its assets in equities and the balance into debt and money market instruments. Debt instruments provide the safety and stability of regular income from coupon payments, whereas equities provide the chance to earn an extra income through dividends and capital appreciation over a period of time. However, in times of market uncertainty, equities can get very volatile, which may negatively affect the overall portfolio returns.

Of late few MIPs have introduced one additional asset class i.e. Gold (through Gold ETFs) to their investment portfolio, with the aim of improving diversification and enhancing performance. Providing the advantage of gold in their portfolio this latest breed of MIPs are identified as MIP Plus. MIP Plus offer an interesting investment proposition by providing exposure to 3 major asset classes (Debt, Equity and Gold). It is suitable for conservative investors who want an investment with the potential to add value in all market conditions and enhance their portfolio returns to beat inflation. Gold has a low or negative correlation with most other asset classes, which means that its price changes are independent of price changes in other asset classes like equities and debts.

Though MIPs aim at generating regular income to its investors in the form of dividends; a word of caution for investors who expect MIPs to declare regular dividends. Contrary to their category name, MIPs are not mandated to declare regular dividends. Dividends in MIPs, as with other mutual fund categories, are declared only if there is adequate surplus for the same.

Monthly Income Plans (MIPs) are suitable for

• Conservative investors who need an investment with the potential to add value across market conditions
• Investors looking to enhance the returns from their portfolio in order to beat inflation
• Investors who aim to generate a regular cash inflow from their investments
• Retired persons instead of making random withdrawals from their nest egg, can invest in MIPs to have a flexible and regular income stream

Performance comparison of Monthly Income Plans

Performance as on July 14, 2010
Source: ACE MF