Should you invest in Monthly Income Plans? Aug 28, 2009

Should you invest in Monthly Income Plans?

August 28, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	15,781.1	768.8	5.12%
Re/US$	48.9	0.2	0.45%
Gold Rs/10g	15,055.0	90.0	0.60%
Crude ($/barrel)	70.8	2.3	3.19%
FD Rates (1-Yr)	6.00%-6.90%

Weekly change as on August 27, 2009

Should you invest in Monthly Income Plans?

Impact

It's common for diversified equity funds to emerge as a top-of-the-mind investment when stock markets are booming. In such a scenario, hybrid funds like Balanced Funds and Monthly Income Plans (MIPs) are relegated to the sidelines. Investors can miss out on a very critical component 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 is time for investors to sit up and recognise the value MIPs can add to their portfolio.

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%-30% of assets. So under what circumstances would MIPs add value to an investor's portfolio? The graph below answers this question.

MIPs vs. Sensex

(MIP returns considered are the category average)

As is evident from the graph, during the crash in the stock markets last year, MIPs have fallen less as compared to the BSE Sensex indices. And this is where it adds value to an investor's portfolio. When the stock markets rally, they will lag conventional equity funds, but when the markets move down, they will limit the fall in an investor's portfolio.

Hence MIPs become important from an asset allocation perspective. Although, you can reach the desired asset allocation by allocating the assets in equity and debt; MIPs offer a convenient way of achieving the same.

Time to cash out?

Impact

Though the stock markets continue to be volatile, they have recovered from the lows touched in March this year. The markets have posted a growth of around 93% (as on August 26, 2009) since March 8, 2009. Expectedly, many investors who have lost a huge chunk of their invested corpus in the stock market crash last year are now eager to recover whatever they can. Now the question is - is it the right time for you to cash out? While you would promptly say YES, at Personal FN we have a contrarian view on this.

Sensex: Rise of the fallen

Broadly, there could be two reasons for making investments. First, and the most ideal reason, is to invest for the purpose of meeting one or more of your future goals/objectives. Second, and unfortunately the most commonly practiced, is to make "quick bucks" by participating in market movements. The latter option amounts to timing the markets, something that many investors try to do, but rarely succeed.

In our view, redeeming investments should not be a function of market movements, but rather a result of the following:

Redeem if you are sure that the fund in question has failed to meet its purpose in your financial plan. The reasons behind this could include poor performance or change in investment mandate of the fund, which makes it a misfit in your portfolio.

Redeem if you have to rebalance your asset allocation. Also,before you cash out, make sure that you have decided where to reinvest the redemtpion proceeds.

Redeem when you have achieved your investment objective.

Financing Avenues available for Studying Abroad

Impact

If you aspire to study abroad and are looking to fund your education, then this piece is for you. Financial aid, education loans and bursaries are the broad categories of finances available to students aspiring to study overseas.

Financial aid primarily comprises of scholarships offered by governments, universities, corporates and charitable trusts. Generally, exceptionally intelligent students qualify for such scholarships. Students who wish to apply for university scholarships have the opportunity to do so at the time of applying for the course. For example, HSBC offers two scholarships for students with guaranteed admission in Oxford, Cambridge and London Universities. Applications for these are accepted between April and June, every year.

Bursaries are endowments given to students based on financial need, and are used to supplement the student's primary source of funding. While this will be a starting point, it would bring down the requirement for funds to some extent.

Education loans are granted by banks and many private institutions (like the JN Tata Endowment for Higher Education of Indians). Education loans offered by banks normally have interest rates in the range of 11%-13% p.a., along with strict norms and collateral requirements for overseas degrees. The repayment period is normally between 5-7 years, and starts after completion of the education or 6 months after securing a job, whichever is earlier.

If a student is not able to get a scholarship and is short on funds, then he has no other option than to opt for an education loan. Although financing avenues have increased nowadays, it is imperative that students take the initiative to research the various funding options available to them and ensure that it meets their requirements.

Where to invest: Liquid Funds...Liquid Plus Funds...or Bank FDs

Impact

Interest offered on one year bank deposits are once again shrinking. These rates offered currently are closer to those offered five years ago. The table hereunder depicts the interest rates offered on the bank deposits.

Bank Deposit Rates
Banks	Interest Rates (%) p.a.
State Bank of India	5.75
Bank of India	6.50
HDFC Bank	5.75
ICICI Bank	5.75
PNB Ltd.	6.50
Bank of Baroda	5.50
HSBC India	4.25
Axis Bank	6.00

(Source: Website of respective Banks)
(Term deposits are for amount above Rs 15 lacs but below Rs 1 crore)

In our opinion, in the current bank deposit rate scenario, you must not plough your money immediately in one year bank deposits. With RBI suggesting an interest rate hike in the coming months; we might see an increase in bank deposit rates. For the immediate ask your financial planner for the best option.

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