Monthy Income Plan
One of the most intriguing dilemmas an investor has to face - is how to manage his money. Some believe that equity is too risky.But the fall in interest rates and the surge in stock marketsprompts us to widen our options.
In this context we find that MIPs are a good long-term investment.
A housewife recently had a discussion with her financial plannerabout reviewing her portfolio. He introduced her to some safe avenues-one of which was a monthly income plan. It had ample debt-almost 75 per cent of the plan-but the remainder in equity gave the scheme a good chance of appreciation. She found that MIPs as a long-term option, could score better than simpler income plans.
With stock markets entering a volatile phase, many investors,including hardcore equity fans, began looking for less-riskieravenues. Mutual funds introduced a variety of schemes to retain investor interest, to meet the demand. MIPs are among the winners.As debt market returns touched historic lows, MIPs gained inimportance, as they take care of risks on both fronts-debt and equity.
The aim is to maximise returns with a dynamic management of equities and careful selection of high-quality debt port-folios,though the debt-equity ratio varies from fund to fund. Blue chipsare the focus of equity portfolios which may not be welldiversified. It even looks at American Depository Receipts and Global Depository Receipts as investment options. Debt papers will have instruments like bonds, debentures, government secu-rities and money market tools. The investment options include growth, monthly dividend, quarterly and half yearly.
Exit loads are 0.50 per cent of the relevant NAVs, though many funds do not charge entry loads. If an investor exits before the 180-day period from the date of allotment in an IPO, he is subjected to this. There is no tax on dividends received by the investor also easy liquidity is a big attraction.What needs to be borne in mind is the long-term perception of the debt-market, which dominates such schemes. Any upward movement in interest rates can upset the return profile of income schemes unless it is balanced by a good perfor-mance by equity markets. Increasing interest rates globally and higher inflation rates in India can spoil the party "Interest rates are compa-ratively higher in India forcing corporates to go abroad and borrow. Moreover, an appreciating rupee would make it difficult for the RBI to hike interest rates.
In recent times return profile if income schemes have been moving southward.While generally, income funds have seen a return of 4.5to 6 per cent in the last few quarters.
With their higher equity allocation, though MIPs are seen as riskier than an income plan, they are better than an equitydiversified scheme. What makes them attractive is the safetyof capital or its limited erosion, and chances of better returns.
by Sukamal Bhattacharya
