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Do MIPs guarantee monthly income? - Outside View by PersonalFN
 
 
Do MIPs guarantee monthly income?

In the past many of you investors have flocked onto to a breed of mutual funds named "Monthly Income Plans" (MIPs) expecting a guaranteed monthly income. Unfortunately senior citizens have shown a larger interest in such a mutual fund product being under a myth that they guarantee a monthly income. Non-senior citizens too (who expect a monthly income) have revealed their interest in such a scheme, without really assessing whether it does meets their requirement. Well, you have either been a prey of mis-selling (done by their mutual fund distributor / agent / relationship managers) or have shown ignorance in understanding an investment product before investing.

While we recognise your desire to earn a "monthly income" from investments, it is vital that you study the product well. Because unless you do that, your mutual fund distributor / agent / relationship manager would continue to mystify you and you'll be a victim of mis-selling. Moreover, while your mutual fund distributor / agent / relationship manager guides you with your investments, it is imperative that you question him on how the product works and thereafter assess whether it suits your investment objective. While we do recognise that some of you do question them (your mutual fund distributor / agent / relationship manager), but in disguise very often they part with insufficient information, thereby safeguarding their own interest of earning luring commissions (for mutual fund distributors / agents) and variable pays (for relationship managers).

It is noteworthy that "MIPs do not assure monthly income": Yes, even though the MIPs (from various mutual funds houses) have been fancily named as "Monthly Income Plans"; they do not assure any monthly income for you. And in our opinion all these names are perfect for the marketers but absolutely imperfect / inappropriate for you investors. Yes, they are misguiding! Please recognise that though MIPs work with the explicit objective of generating regular income for you investors, by investing a dominant portion of its assets in debt instruments, along with the help of an 'equity push' (debt to equity composition in their portfolio is generally 75:25), they actually do not assure of any "fixed returns".

Some of you may be wondering what happens if one opts for the dividend option. Yes, as far as the dividends are concerned they too aren't mandated to be declared on a regular basis. So, even if you opt for a monthly or quarterly dividend option, there are possibilities you may not receive them regularly at the specified interval (i.e. monthly or quarterly), thereby landing you in the wrong lane.

Please recognise that dividends in MIPs, as with other mutual fund categories, are declared only if there is adequate surplus generated by the fund to declare the same.

Now, that your myth of a "guaranteed monthly income" from MIP (from mutual funds) is debunked, let's take a closer look at what are MIPs actually are and who can benefit from them.

What are they?
MIPs are debt oriented hybrid funds with a small equity component. MIPs generally invest 0% to 25% of its assets in equity and equity related instruments and the balance (i.e 75%) in debt and money market instruments. So, a major portion of their portfolio earns stable income from the coupon payments, thus providing safety and stability; the small portion of equity on the other hand, adds a zing to the overall portfolio by enabling the fund to benefit from capital appreciation and off course earn dividends from its stock holding. But a noteworthy point is, during the downside of the equity markets an MIP can take toll on the returns front; and this especially is true in the case of an MIP having a dominating portfolio in the mid cap segment in its equity composition.

Hence broadly, MIPs serve as a dual purpose of safety as well as an ability to earn higher returns through the equity push.

Who can benefit from them?

  • Conservative investors: If you are an investor, who isn't willing to take more risk (i.e. your appetite for risk taking is low), but need an investment product with the potential to add value across market conditions, then this product would do well for your portfolio (due to the typical debt to equity composition of 75:25 followed by them).

  • If you intend beating the inflation rate: Since the equity portion adds a zing to returns of an MIP, it can also be like a catalyst for beating the average annual inflation rate. Moreover, regular coupon payment received from the dominant debt portfolio also helps in providing an upward push to the returns while being risk averse.

  • Cash flow from investments: All those investors who want to obtain cash flows from their investments (in the form dividends) but do not expect them to be consistent in amount and / or in the form of their consistency in which they are defrayed can opt for an investment in MIP.

  • Retired persons: For retired individuals who risk appetite is low, instead of making random withdrawals from their nest egg, they too can invest in MIPs to have a flexible income stream.
After having debunked the myths and learnt more about MIPs, we are sure you would be interested in knowing how the MIPs have performed across time frames and their percentage of holdings in equity and debt instruments.

Report card
Scheme Name 1-Yr (%) 2-Yr (%) 3-Yr (%) 5-Yr (%) Since Inception (%) Std. Dev (%) Sharpe Ratio Equity(%) Debt & cash (%)
Reliance MIP (G) 0.7 5.5 15.2 11.8 11.0 2.53 0.26 19.2 80.8
HDFC MIP-LTP (G) 1.5 7.3 13.4 11.8 11.9 2.81 0.18 23.0 77.0
Canara Robeco MIP (G) 2.4 6.4 11.5 12.1 7.4 2.38 0.16 15.7 84.3
Birla SL Monthly Income (G) 2.1 6.3 10.3 9.8 11.6 2.06 0.13 10.7 89.3
UTI MIS Adv (G) 1.4 5.4 9.9 9.8 9.9 2.10 0.11 24.2 75.8
ICICI Pru MIP 25 (G) 0.8 5.4 9.3 8.8 9.7 2.92 0.07 21.0 79.0
HSBC MIP-Savings (G) -0.8 3.3 8.8 10.0 9.3 2.20 0.08 22.0 78.0
FT India MIP (G) 1.8 4.2 7.5 8.4 10.1 1.90 0.02 20.0 80.0
LIC Nomura MF MIP (G) 0.0 2.3 6.4 8.1 9.2 1.74 -0.01 18.1 81.9
Category Average* 1.5 4.7 7.8 7.9 7.5 1.6 0.0 - -
Crisil MIP Blended Index 0.7 4.3 7.3 7.6 - 1.84 0.01 - -
(NAV data is as on June 17, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
*Note1: Category average has been calculated taking the "simple average", of all the funds in the respective categories and not only the set of funds above in each category.
Note 2: % of equity and debt holdings for all the funds are as on May 31, 2011
(Source: ACE MF, PersonalFN Research)

However remember, the next time you visit your agent / distributor / relationship manager, please don't get swayed by the performance table he exhibits to you. Instead, please the recognise whether the product suits your investment objective(s) and risk profile, now that you have learnt that MIPs do not offer guaranteed monthly income along with other facets in them.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

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1 Responses to "Do MIPs guarantee monthly income?"

gg

Jul 19, 2011

Quote: "Please recognise that dividends in MIPs, as with other mutual fund categories, are declared only if there is adequate surplus generated by the fund to declare the same."

Actually, I think some funds have the practice of declaring monthly / quarterly dividends even if there is no surplus - i.e. by dipping into the fund's corpus. Some distributors tom-tom this as an unbroken dividend record - no one clarifies that this so-called "dividend" is being paid from your own funds invested. Its like withdrawing capital from your bank account and calling it a "dividend".

Overall I believe it is more efficient to put Rs. 75 in a few top-performing debt schemes and Rs. 25 in top-performing equity schemes rather than Rs. 100 in an MIP. Advantages:
i. It is more tax-efficient (equity funds are exempt from long-term cap gains unlike MIPs)
ii. Pure Debt funds have lower management fees and exit loads, so 75% of your capital will benefit from lower fees.
iii. Allows you to withdraw only one portion if you wish (e.g. if your risk appetite or market-view changes - can withdraw from equity funds while keeping the debt fund investments).
iv. Best of all you can choose from the best of equity and debt funds respectively while getting the exact same capital allocation as with choosing an MIP.

MIPs do offer a "convenience" factor, which might be useful for investors investing direct in MFs. But if you're going through an MF advisor / wealth manager (who, after all, is supposed to manage complexity for you), you should insist on them selecting the best of Debt and Equity funds and investing your money separately in each.

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