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Monthly income plans with less than 25% in equities

LiveMint logoLiveMint 11-07-2017 Kayezad E. Adajania

Apart from mutual fund schemes that invest just in debt and equity securities, there are some funds that invest in both these asset classes. Monthly income plans (MIPs) are one of those.

Although MIPs are debt-oriented funds, they invest up to 25% in equities. But not all MIPs can reach that limit. Some MIPs can invest up to 10%, some can do 15-20%, and few of them can invest up to 25%. For instance, HDFC Monthly Income Plan - Long Term Plan can invest up to 25% but UTI Monthly Income Scheme can invest only up to 15% in equities, as per Value Research. Called monthly income plans, these were originally meant to give out monthly dividends. But this is a misnomer because the Securities and Exchange Board of India (Sebi) prohibits mutual funds from assuring any income or dividends. Yet, the names continue.

MIPs are managed in a way that the fixed-income portion aims to generate a steady revenue while the equity portion gives the kicker.

Vipul Sharma/Mint

Since the asset allocation of one MIP can be very different from another, the risk levels and returns expectation can vary widely, too. For instance, one MIP’s debt portion’s average maturity can be much higher than another’s, depending on what the fund manager’s view is on the interest rates. ICICI Prudential MIP25’s average maturity is 9.93 years while Sundaram Monthly Income Plan - Aggressive Plan’s average maturity is 3.80 years, as per Value Research. Both have invested up to 73% in debt.

Similarly, how the fund manager manages the equity component also differentiates one MIP from another. And this impacts the returns. First, an MIP ascertains how much equity it can invest in. Thereafter, it needs to decide what sort of companies it would invest in: large-sized, mid-sized or small-sized. BOI AXA Regular Return Fund has invested around 50% of its equity allocation in mid-sized companies and 28% in small-sized companies, as per Value Research. IDBI Monthly Income Plan has invested its entire equity portion in large-sized companies. That is one way that your MIP aims to control the risks it takes.

Typically, an MIP that has a high average maturity is riskier than a fund with lower maturity. But that also largely depends on how interest rates will go in the future. If your fund manager’s reading is right, a high average maturity debt portion works to your advantage. On the equities side, higher allocation to mid- and small-sized companies is riskier than a fund that tilts its portfolio significantly toward large-sized companies. Expect MIPs to return more than pure debt funds due to the presence of equity exposure.

Although MIPs don’t assure regular returns, many well-managed MIPs aim to do the same. For elders who need some sort of regular income, MIPs are a good option.

Also, if you are risk-averse, MIPs are good stepping stone to investing in equity, with its selective and small equity exposure. Once your risk tolerance grows over time, you can shift to low-risk pure equity funds.

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