Mr Ramanathan K, AVP – Fixed Income, Birla Sun Life Mutual Fund, is the fund manager of Birla Monthly Income Plan (MIP). He is a mechanical engineer with a post-graduate degree in Finance from S P Jain Institute. His responsibilities include taking decisions on all debt funds of Birla Sun Life Mutual Fund – Birla Cash Plus, Birla Income Plus, Birla Bond Plus and Birla Gilt Plus.

Personalfn decided to interview Mr Ramanathan on the back of Birla MIP’s sterling performance that has caught everyone’s notice. Mr Ramanathan aired his views on the interest rate/economic scenario, the salient features of MIPs and what has made Birla MIP such a success story.

PFN: What is your view on interest rates at present and going forward?

Mr. Ramanathan: The IIP (Index of Industrial Production) growth for the month of July was around 6.4% and the growth during Apr-Jul 2002 at around 4.7% as against 2.3% during the same period last year. Credit offtake (including bonds and excluding the impact of the ICICI-ICICI bank merger) also showed a significant growth of Rs 283 bn during April-Aug 2002 as compared to Rs 48 bn in the same period last year. Core inflation has also started to rise and was up around 3.04% for the week ended August 24, 2002 as against 1% seen in July 2002. The increase in the prices of petrol and diesel w.e.f from September 15, 2002 will also have an impact on the headline inflation number going forward.

While industrial growth, credit offtake and manufacturing inflation numbers have shown a significant rise, the improvement could be stunted due to the impact of drought. The signals are mixed as of now and the extent of impact of drought on demand is still not clear as there is a lag of about 3-6 months.

The system continues to be awash with liquidity with large subscriptions in both overnight and 14-day repos. But liquidity could tighten a bit due to the advance tax outflows. Also the corporate bond market could take a little breather until September end due to profit booking by banks for capital adequacy purpose.

As of now liquidity should keep the yields rangebound but growth and inflation numbers needs to be closely watched and their direction would dictate the movement of yields going forward

PFN: For some reason, monthly income plans haven’t really taken off after that initial surge. What are the reasons for this lack of interest?

Mr. Ramanathan: Money still continues to flow into monthly income plans. But since the investors are typically retail in nature the growth rate would be much lower compared to income/short term bond funds/ liquid funds where there are large corporate investors too. In fact Birla MIP has grown from about Rs 650 m to about Rs 1,200 m. in a span of about 5 months.

PFN: There is scope in marketing MIPs as a 20:80 balanced fund for safe investors and not just as an investment that allows for a steady income stream. Do you believe this balanced fund proposition hasn’t been tackled adequately by fund houses?

Mr. Ramanathan: An MIP is typically perceived as being a product only for old age or for the low-income group where regular monthly income is the main consideration. The focus is always on the ‘Monthly Dividend’ option. While MIPs do cater to this need what is not perceived is the fact that an MIP also caters to a wide base of investors including HNIs, Institutions, Trusts etc. – through the ‘Growth Option’.

The ‘Growth’ option of an MIP fits in neatly into the risk-return profile between a pure income fund and a balanced fund. This slotting is especially important now because we are seeing the dawn of a low interest rate regime. There is a possibility that going forward, if the interest rates continue to be at these levels, the returns from these funds will at best be average. It is in such a scenario that the ‘Growth’ option of an MIP becomes attractive. This is more so to investors like HNIs, Institutions, Trusts etc. as these investors typically do not require a regular monthly dividend inflow. However, capital appreciation with a controlled level of risk is an extremely important parameter for investment.

The controlled equity exposure of a maximum of 15% should deliver the icing on the cake over the medium term and should generate higher returns compared to a pure debt fund, albeit with a slightly higher level of risk.

Plus the other benefits of the ‘Growth’ option are:

• no tax deduction at source
• availability of the benefit of indexation / double indexation which reduces the tax incidence.

A typical question in the minds of the investor would be – if MIP has an asset allocation of 85% in debt and 15% in equity is it not equivalent to investing 85% of the money in a pure debt fund and the remaining 15% in a pure equity fund? The answer to this is portfolio rebalancing – it is extremely difficult for an individual investor to dynamically rebalance his portfolio depending on market dynamics. For example in the uncertain equity market, which we saw during the Jan to March 2001 period, Birla MIP reduced its equity exposure to less than 1%. The exposure was as high as 7% in the months of November-December 2000 and as I write, the exposure today is around 6%. Such dynamic rebalancing of portfolio is essential in a volatile market to protect returns on the portfolio.

PFN: At the end of the day, what in your view sets apart a bond fund that allows for a monthly dividend against a monthly income plan?

Mr. Ramanathan: MIPs are for investment horizons of at least 1 year. This is because there can be short term fluctuations in the equity component (as compared to a bond fund where there is no equity exposure) which can affect short term returns on a point-to-point basis. So for this investment horizon, with active management of the equity component an MIP should generate better returns as compared to a bond fund.

PFN: Birla’s MIP has been very consistent in declaring dividends at reasonable rates. To what do you attribute your successful performance?

Mr. Ramanathan: Dynamic rebalancing of the debt:equity components has been one of the prime reasons for good performance. In equity we adopt a bottom-up approach, stress on management track record, business model, and sustainability of growth rates apart from the valuation attractiveness. We would also actively manage the portfolio to capitalize on the opportunities offered by the market fluctuations. The equity portfolio would be broad based and would avoid concentrations in a particular stock or sector. Also focus will be on low beta stocks.

We also maintain a cushion of about 3 months dividend payment in case of any unforeseen fluctuations in debt and/or equity markets. This has helped us to maintain our consistent dividend payment track record.

PFN: Ideally what should be the differentiating factor for investors while selecting a MIP?

Mr. Ramanathan: Consistent dividend paying track record and active management of the equity component.

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