‘Why pay your recurring expenses when your investments can?’ This is how a typical Monthly Income Plan (MIP) scheme advertisement reads. The message is clear: invest in an MIP to generate regular earnings. However, it isn’t as simple as it appears. As MIPs are no longer assured returns products investors have to take risks in order to receive returns. And this is something which many investors are not comfortable with. This is because these MIPs have a small exposure to equity. Though this equity exposure is small, but even then it can boost returns or send them tumbling. The first open-ended MIP, Alliance MIP, was launched in July 1999. By March 2000, the unit capital of the category had grown to Rs 625 crore. A year later, seven mutual funds had introduced an MIP and the unit capital shot up to Rs 1,004 crore. However, after March 2001, the growth trend had reversed, and by March 2002, the unit capital had fallen to Rs 841.5 crore. By September 2002, the total unit capital had touched Rs 1,184 crore, with Alliance and Prudential ICICI MIP accounting for over 50 per cent of this. Even with this growth, MIPs account for just 1.3 per cent of total assets under management of the mutual fund industry. Normally, most MIPs keep a provision of 15 per cent equity exposure. The sole exception is Franklin Templeton India MIP, which has a mandate to invest a maximum 20 per cent of the portfolio in equities. So far, most schemes haven’t tested the limits of maximum equity exposure. But that isn’t the point. The question is whether equities have fetched any gains for MIPs? The answer: yes as well as no. In March 2000, Alliance MIP declared a dividend of 11 per cent for its monthly plan and 13 per cent for the quarterly plan. Obviously it wasn’t debt instruments that helped the scheme raked in such high gains. Instead its equity exposure of 8.15 per cent, mainly in technology stocks, that helped the fund turn in handsome returns. On the other hand, Sun F&C MIP had a bitter experience. Launched in March 2000, the fund failed to provide dividends for the period July-December 2000. One major reason for this was that its pick, Mascon Global, which accounted for 5.5 per cent of its portfolio on May 31, 2000 fell sharply in value. Considering the debt portfolio, most funds are heavily reliant on corporate bonds and their coupon payments to generate monthly income. Gilts, on the other hand, play a relatively smaller role, usually accounting for up to 25 per cent of the portfolio. Depending on the relative attractiveness of each instrument allocations vary. Thus, almost all MIPs reduced their gilt exposure between February and March 2002, following an increase in the spread of corporate bonds over gilts. Broadly speaking, MIPs dumped equities for almost the entire 2001. In this year debt yielded more returns than equity as interest rates moved downwards. Thus in 2001, MIPs with higher exposure to longer-tenure debt instruments-mainly gilts-and a low equity exposure were top gainers. The combination of equity along with gilts can render these funds volatile. Thus, MIP returns took a hit after 9 Birla MIP and Prudential ICICI, were the only MIPs to record positive growth in this month. Prudential ICICI escaped unhurt as it had no equity exposure while Birla had maintained low exposure to equities and gilts. In 2002 those MIPs which have ventured into equity and managed it well have gained the most. For MIPs stability is more important and so gilt exposure is considerably lower and bonds dominate the portfolio. The desire for lower volatility also results in lower average portfolio maturity. In a falling interest rate environment these funds take a hit as coupon income decreases. As gilts largely move in the same direction as bonds, MIPs allocate a small amount to the other asset class — equities, to boost returns. In a situation where the low interest rate regime of today persists, MIPs will have to work harder to generate monthly payments. In this environment, investment in equities may be the only way out. However, this also has its share of risks as has been witnessed in the past two years. With the era of assured returns coming to an end, investors will have to make peace with the fact that higher returns means higher risks. The writer is the chief executive of a leading mutual funds tracker ValueResearchOnline.com
