Equity component adds flavour by generating higher returns
Investors face dilemma while preparing their financial plan. The highly
volatile equity market conditions might lead to the erosion of returns
if invested in pure equity mutual funds and at the same time the
investors would generate less returns from pure debt funds. To resolve
this issue, Monthly Income Plans (MIPs), one of the hybrid varieties of
mutual fund product has proved to be a good option for conservative
investors by taking a minimal exposure towards equity instruments to
provide good returns and at the same time reducing volatility in the
portfolio through relatively high exposure in debt instruments.
The debt portion provides the stability to the portfolio while
the equity part is expected to ensure that the benefit of appreciation
in the portfolio is present. Moreover, the equity component in the fund
adds flavour by generating higher returns. This is expected to maintain
the required amount of balance in the portfolio. The MIPs keep churning
their holdings between equity and debt depending on the market
movement. When higher volatility is expected, they take the
conservative approach. A long term investment into this category of
fund is necessary to overcome any short term volatility in stock
prices.
An investor with a moderate risk appetite would ideally look this
kind of funds. These funds do not guarantee monthly income nor are they
obliged to disburse money at periodic intervals. However, most of the
funds in this category try to meet the monthly income expectations of
the investors. The monthly income which comes in form of dividend to
the investors, provide a source of income for investors who are not
about to take risk, especially retired person or moderate risk taking
investors.
Monthly Income Plans (MIPs) which are conservatively positioned
funds; investing about 10% to 20% of their assets in equities; have
delivered an average return of 8.33% over 3 year time period as on 26
April 2010. Currently, as interest rates are volatile, most MIPs have
reduced their average maturity to less than two years. Since they hold
most of their debt securities till maturity, they can lessen interest
rate risks to a certain extent. A shorter portfolio maturity reduces
risk during a rising interest rate scenario.
MIPs have been investing into equity, corporate debentures,
certificate of deposits, commercial papers, PSU/ PFI Bonds, government
securities, cash & other current assets. Among the top ten schemes
based on 3 year return as on 26 April 2010, Reliance Monthly Income
Plan had topped the MIP category with a return of 14.48%, followed by
HDFC Monthly Income Plan - LTP (12.69%), Canara Robeco Monthly Income
Plan (12.68%), Birla Sun Life MIP II - Savings 5 (12.40%) and L&T
Monthly Income Plan (12.34%). All the top 10 schemes based on 3 year
return have outperformed both the category average as well as Crisil
MIP Blended Index. The category average stood at 8.33% for three year
time period. We have analysed the top four schemes based on three year
returns.
Reliance Monthly Income has been the top performing fund under MIP
during 3 year time period. It has outpaced the Crisil MIP Blended Index
over 1 year, 3 year and 5 year time period by 7.74%, 6.40% and 4.84%
respectively. The scheme has the asset allocation pattern to invest up
to 20% of assets in equity and 80% to 100% of assets in fixed income
securities. When we look the asset allocation of this scheme, it had
allocated 14.05% on an average into equity during the last one year
(April 2009 to March 2010). On the other hand, the average allocation
of 24.78% is in non convertible debentures, 20.64% in government
securities and 18.21% in certificate of deposits among others over the
last one year. The total net assets of the scheme have grown by Rs
3767.21 crore in March 2010 from Rs 176.71 crore in April 2009.
However, the fund's average portfolio maturity has been shrinking
from 7.66 years in April 2009 to 1.24 years in March 2010 indicating
that it has been adjusting its portfolio and reducing long-term
instruments to suit interest rate hikes.
HDFC Monthly Income Plan – LTP has beaten Crisil MIP Blended Index
over 1 year, 3 year and 5 year time period by 14.42%, 4.61% and 4.67%
respectively. This scheme has the asset allocation pattern to invest
75% to 100% in debt instruments and 25% to 100% in equities. It had
more allocation into corporate debentures during the last one year. The
scheme had allocated 22.96% on an average into equity during the last
one year (April 2009 to March 2010). In the debt assets part, it had
53.03% on an average in corporate debentures, 14.31% in certificate of
deposits and 5.63% in government securities among others. The total net
assets of the scheme have grown by Rs 4189.39 crore in March 2010 from
Rs 899.65 crore in April 2009.
The fund's average portfolio maturity has also been shrinking from 5.72 years in April 2009 to 2.09 years in March 2010.
Canara Robeco Monthly Income Plan (G)
Canara Robeco Monthly Income Plan has been able to generate returns
above Crisil MIP Blended Index over 1 year, 3 year and 5 year time
period. It has outpaced the index by 6.85%, 4.60% and 5.43%
respectively. The scheme has the asset allocation pattern to invest 10%
to 25% in equities and 75% to 90% in debt & others. The scheme had
allocated 20.46% on an average into equity and 78.2% in debt during the
last one year (April 2009 to March 2010). In the debt assets part, on
an average 8.65% has been in corporate debentures, 17.23% in commercial
papers, 38.90% in certificate of deposits, and 39.71% in CBLO during
the last one year. The scheme had also made investments into Mutual
Fund Units, net current assets & others. The asset of the scheme
has surged from Rs 6.53 crore in April 2009 to Rs 199.90 crore in March
2010.
Contrary to its peers, the fund's average portfolio maturity has
increased from 0.01 years in April 2009 to 0.9 years in March 2010.
Canara Robeco Monthly Income Plan is a highly volatile scheme with a
standard deviation of 0.57% (among the top 10 schemes) at the same time
the risk adjusted return (shape ratio) in on the lower side with 0.06.
Birla Sun Life MIP II - Savings 5 (G)
Birla Sun Life MIP II - Savings 5 has outpaced Crisil MIP Blended
Index by 4.32% and 1.11% over 2 year and 3 year time period, while it
has underperformed the Crisil MIP Blended Index by 1.20% over 1 year
time period. The scheme had allocated 5.07% on an average into equity,
74.12% into debt and 20.84% into cash & other current assets during
the last one year (April 2009 to March 2010). The schemes debt
allocation had gone into corporate debenture, certificate of deposit,
commercial paper, government securities, PSU/PFI bonds and pass through
certificate among others. The asset of the scheme has surged from Rs
30.73 crore in April 2009 to Rs 1773.13 crore in March 2010.
The fund's average portfolio maturity has been shrinking from 2.07 years in April 2009 to 0.88 years in March 2010.
MIPs have been declaring dividend under dividend option of the
scheme on monthly, quarterly, half yearly and yearly basis. During the
last six months period from October 2009, HDFC Multiple Yield Fund-Plan
2005 - (D) and HDFC Multiple Yield Fund (D) had declared a highest
dividend of 17.12% in February 2010. LICMF Floater MIP - Yrly Income
and LICMF Monthly Income Plan - (Div-A) had declared dividend of 15%
and 13% respectively in March 2010.
Investment into MIP will be an ideal option for conservative
investors who have been investing into fixed deposits, post office
monthly income scheme and pure income scheme. Investors can get monthly
income in form of dividend by choosing dividend option under the
scheme. However, monthly income in the form of dividend would be made
available to the investors only when distributable surplus is available
under the scheme. Moreover, the no entry load regime brings down the
cost of MIPs.
Most of the MIPs have reduced average maturity of their portfolio to
less than two years to moderate the interest rate risk. Since they hold
most of their debt securities till maturity, they can lessen interest
rate risks to a certain extent. The equity portion adds spiciness for
the portfolio and helps to generate better performance in rising
markets.
