VR Logo

MIPs shun Equity for stability

Clearly, even though open-end MIPs do not assure returns, they are under pressure to declare monthly payouts. Thus, most new MIPs have been prudent to abstain from equities amidst the high pitched volatility.

Fund managers of the new-breed monthly income plans are learning it the hard way. Having burnt their fingers even with a marginal allocation to equities, monthly income plans are consciously staying away from the stock markets. A few MIPs were forced to forego on their monthly dividends as the equity markets plummeted in 2000 and pulled down the NAVs to unviable levels for a payout.

Take for instance, Sun F&C Monthly Income Plan. With around 7% investments in equities, the MIP declared its first dividend of 9 paise in July 2000. However, sliding equities took a toll and pulled down the NAV to a low of Rs 9.78. The next monthly dividend from the scheme has come only in January this year, with the fund virtually selling off its stock holdings.

On the other hand, the streak of monthly dividends from Alliance MIP finally got broken with the AMC skipping the payout for December. Even though the fund has slashed the equity component to below 7%, the fund manager could not generate distributable surplus in the face of volatility in equity markets even though December was robust for bonds.

Among other funds, Reliance and Kothari do not have any equity exposure while Templeton does not invest in equities under the monthly option. Birla MIP too has started off on a conservative note, with only 4% investment in equities.

"We do not have the luxury to invest (in equities) on a long term basis in TMIP plans. We want to build a very conservative strategy for equity investments in the portfolio. That apart, we want some buffer built in monthly and quarterly plans so that the volatility in the equity market does not effect the dividend declaration capability of those plans,'' says Nilesh Shah, chief investor officer, Templeton. Adds Suresh Soni at Kothari Pioneer, "We will invest in equities in KP MIP gradually and selectively in line with the conservative nature and expectations of our investors.''

Clearly, even though open-end MIPs do not assure returns, they are under pressure to declare monthly payouts. Thus, most new MIPs have been prudent to abstain from equities amidst the high pitched volatility.

"While an MIP may look like another bond fund, we have to live up to the expectation of the investor. Thus, we may soon have equities only in half yearly or growth options while the monthly option portfolios only carry bonds. With a 100% debt portfolio generating regular returns, this should enable us to declare regular dividend,'' says the CIO of a mutual fund. A wise strategy this!