With the kind of attention, monthly income plans (MIPs) have drawn over the past couple of years, this product looks set to establish itself as a must-have in investor portfolios.
First the facts
What are MIPs? MIPs are designed with the explicit objective of giving a regular return (in the form of an income) to investors. The periodicity of returns depends upon the option chosen by the investor. MIPs generally come with the monthly, quarterly, half-yearly and annual options. Investors who choose the growth option, will be obviously not be entitled for a return by way of dividend, but will get a return in the form of capital appreciation.
MIPs must not be confused with plain vanilla income (debt) funds. Income funds differ from MIPs based on the investment objective. MIPs are launched with the very objective of giving a monthly income to investors. Income funds on the other hand are launched with the objective of posting regular returns (either in the form of dividends or capital appreciation).
Apart from the investment objective, there is another critical difference between a MIP and an income fund - the asset allocation. To realise its investment objective (of providing regular dividends), an MIP has the option to invest some portion of its assets (about 10-15%) in equities. That is why, MIPs are categorised as balanced funds. Income funds invest only in fixed income securities (corporate bonds, govt. securities, treasury bills, cash/call) and fall under the income/debt fund category.
Potential to do even better
| MIPs |
NAV (Rs) |
1-Mth |
6-Mth |
1-Yr |
3-Yr |
Incep |
Std Dev. |
Sharpe Ratio |
| FT INDIA MIP G |
13.5 |
1.1% |
4.8% |
12.3% |
NA |
12.1% |
1.12 |
0.30 |
| BIRLA MIP C G |
13.6 |
1.4% |
5.3% |
12.0% |
NA |
13.0% |
0.80 |
0.56 |
| ALLIANCE MIP G |
17.1 |
2.1% |
6.8% |
11.8% |
10.6% |
14.5% |
1.10 |
0.32 |
| RELIANCE MIP G |
13.5 |
0.8% |
3.3% |
10.3% |
NA |
11.7% |
0.47 |
0.62 |
| TEMPLETON MIP G |
13.6 |
1.4% |
4.8% |
9.6% |
10.0% |
9.9% |
0.94 |
0.27 |
| PRUICICI MIP C |
13.0 |
0.9% |
3.6% |
9.1% |
NA |
10.4% |
0.52 |
0.38 |
| SUN F&C MIP G |
13.0 |
0.8% |
2.0% |
8.9% |
8.5% |
8.2% |
0.95 |
0.20 |
| MAGNUM MIP G |
12.0 |
0.8% |
2.5% |
7.6% |
NA |
8.9% |
0.49 |
0.24 |
(NAVs as on May 20, 2003. Growth over 1-yr is annualized. Std Dev and Sharpe Ratios as on March 31, 2003)
Earlier on, MIPs were affected by a perception problem, which can be traced to UTI's MIPs. As UTI assured a monthly income to investors, investors came to expect the same from MIPs of private sector funds (which do not assure dividends). When private sector MIPs skipped dividends in hard times, investors were left alienated. It did take some doing on the part of SEBI. AMFI and the private fund houses to establish the demarcation between these two products i.e. UTI's assured MIPs and private fund MIPs.
Suitability
Typically, the MIP investor is one who is either past his/her retirement or is nearing it. To that extent, MIPs suit the investor profile of a retiree/semi-retiree. However, even younger investors can invest smaller amounts in the growth option of MIPs.
As Mr Ramanathan (Birla MIP, fund manager) elaborates in his interview to personalfn, '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.'
Look for a consistent dividend track record
| |
Month 1 |
Month 2 |
Month 3 |
Month 4 |
Month 5 |
| Birla MIP |
0.70% |
0.70% |
0.70% |
0.70% |
0.90% |
| Reliance MIP |
0.70% |
0.61% |
0.68% |
0.72% |
0.70% |
| Templeton MIP |
0.60% |
0.60% |
0.75% |
1.25% |
0.75% |
| FT MIP |
0.65% |
0.65% |
0.75% |
0.75% |
0.75% |
| PruICICI MIP |
0.53% |
0.53% |
1.82% |
0.60% |
0.60% |
(Only monthly dividend options considered. Month 1 indicates latest month)
MIPs Vs Income Funds
Pure income (debt) funds and gilt funds do not compare favourably to MIPs mainly because the MIP investor is looking for a monthly return, which income funds do not strive to provide. A pure income fund would be hard pressed to distribute monthly dividends on a sustained basis. MIPs manage to do that due to the small equity portion which acts as a kicker. To that extent MIPs rely on the equity portion heavily for distributing monthly income. Over the past couple of years, MIP and income fund dividend payouts have been comparable on an annualised basis. However, in a bullish equity market (which we haven't seen for some time now), MIP dividend payouts will be higher.
MIPs Vs Bank FDs
Return on FDs are assured, unlike MIPs. So the FD depositor is sure of the bank shelling out the monthly interest amount. To that extent an FD (monthly income option) scores over MIPs for the very safe investor. Moreover, unlike MIPs, FDs are rated by agencies and this enables the investor to determine the investment avenue that best suits his risk profile. However, while MIPs may not be rated, the intelligent investor can check the ratings of the MIP's investments (be it in bonds, debentures) and determine a good MIP.
The tax-efficient option
MIPs score over comparable investment avenues in tax efficiency. MIPs are more tax efficient than bank FDs as mutual fund dividends are tax-free in the hands of the investor. Income from bank FDs are exempt up to Rs 9,000 (under Section 80L), beyond which they are taxed depending on the tax bracket of the individual.
The MIP appeal
MIPs definitely have a future given its wide-ranging appeal to conservative and aggressive investors. The potential for such a product is very much there, as it offers stable returns with the additional incentive of higher returns (should the equity portion do well).
Krishnamurthy Vijayan (CEO, JM Mutual Fund) for one forecasts a bright future for MIPs, People are definitely going to require monthly income plans. There are a whole lot of people who want to save for a rainy day and on retirement they would like a steady income stream. These people will have to be catered to. MIPs are here to stay and there will be such products coming out regularly.
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