Monthly requirement of income is essential for a large number of people and there are investments that are tailor made for such needs. One such option is the monthly income schemes that are available from various sources.
In terms of choice, the post office has a monthly income scheme and even mutual funds have a category of schemes that are named monthly income plans.
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MIP- Nature
The Monthly Income Plan (MIP) of mutual funds seeks to ensure that investors are able to generate a regular source of income for their needs. There is a small but significant difference that will be witnessed in these schemes because of the fact that unlike other options the monthly income here is not guaranteed.
There are two angles to this point as the amount of return is not fixed and at the same time there is also no surety that the scheme will actually pay out a sum as monthly income. If the conditions are not appropriate then the fund might even skip the payment altogether and this has been witnessed in several cases when the returns of the scheme have stopped for some months when the schemes faced tough times.
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The portfolio of the scheme is constructed in such a manner that this kind of monthly return is possible. There is a mixture of debt and equity that is used in the portfolio and while the majority debt portion will provide stability to the portfolio it is the equity portion that is expected to power the returns. Both these areas together complement each others’ role and the investor is supposed to benefit from the investment.
| Monthly income plan ( One year performance ended 10 Nov, 2009) | ||
| Scheme | Returns | Equity component |
| (% of portfolio) | ||
| HDFC MIP Long Term | 36.4 | 21.8 |
| Birla Sun Life MIP II Walth 25 | 31.5 | 18.1 |
| Reliance MIP | 31.2 | 12.9 |
| ICICI Prudential Income Multiplier Reg | 28.1 | 24.4 |
| Birla Sun Life MIP | 26.5 | 11.6 |
| Source : www.valueresearchonline.com | ||
| Equity component as at end of October 2009 | ||
Portfolio construction
The portfolio construction in the entire scheme is very important as the extent of the returns depends upon the exact nature of this act. Since the portfolio consists of both equity as well as debt the exact composition of these two areas will determine the manner in which the performance will change. Even small changes in the composition can have a large consequence in terms of the final return from the scheme.
There is a large leeway that is available for mutual fund managers in the monthly income scheme.
They can invest in equities till a maximum amount of usually 15-20 per cent but in several cases there is permission for them to go even upto 30-35 per cent in equities. The final figure that is invested is important but it is also vital to note the extent till which this can be done as this frames the risk-reward ratio.
If there is just around 10 per cent of the portfolio that is in equities then the influence of this is comparatively lower. Due to the fact that the equity investments in India are quite volatile there is a good probability that the influence of this 10 per cent of the equity is significant in terms of the movement of the net asset value of the scheme.
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This is present even when nearly 90 per cent of the portfolio is in debt so there has to be some attention that is paid to the equity portion.
A situation where the equity component is 20 per cent puts even more attention and value to the equity investment. This happens due to the fact that there is a very large power that is present with this component in determining the overall movement of the returns and just a small change can result in the entire nature of the scheme being quite different.
A look at the reality in terms of the actual equity component and the performance of these schemes show how that 3 out of the top 4 performing schemes have an equity component in the range of 18-24 per cent.
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Often there is an attempt to raise the return from the scheme and since there is a facility that is offered through the possibility of a higher equity component this is often used by the fund manager.
In this sense if the equity component creeps up and goes to around 25-30 per cent then there is a drastic difference in the nature of the scheme. The risk component of such schemes changes because the higher equity part has raised the risk of the scheme significantly.
While the name of the scheme is MIP it for all purposes behaves like a balanced scheme and a majority of the schemes in the balanced category have this kind of equity debt composition. Here the importance of the entire debt portion of the portfolio becomes negligible because there is little or no impact on the overall returns of the fund.
It can be seen that even though the name of the scheme is a monthly income plan due to the nature of the portfolio this can come to mean very different things. Traditionally the equity component was in the range of 7-10 per cent. There is a different risk that is present for each of the different compositions and this will also go on to impact the returns.
Arnav Pandya is a Chartered Accountant and a management graduate from IIM Bangalore with a specialisation in Finance. He is also a Certified Financial Planner with experience of over a decade in the field of personal finance.
The views expressed in the article are the author's and not of Sify.com.
