The largest mutual fund house, Unit trust of India is in the market with its first Monthly Income Plan for the year 2001. The scheme is a five-year closed - ended plan and offers an assured return for the first year. Returns for subsequent years will be assured in March every year. The fund is available at par with a minimum subscription of Rs 10,000. Investors have three income options under the scheme. While investors receive payout under monthly and annual plans, the dividend is aggregated in the cumulative plan and paid at the time of redemption.
For the current year, the fund has assured a coupon of 9.75%, payable monthly, while the coupon works out to 10.2 % under the annual option. The income is tax free in the hands of investors. The periodic dividends would be paid from ECS wherever feasible and through Income Distribution Warrants at other places. Investors hold the option to switch across the three options once a year for the forthcoming year.
The fund seeks to achieve the task of doling out assured returns with a portfolio predominantly comprising debt instruments. While at least 80% of the investments would be in debt securities, the fund can invest up to 20 % in equity instruments.
Assurances from the popular MIP series have largely been on a steady decline over the years from the peak levels in 1997. For instance the last MIP of 1996 offered the highest coupon 16.08% for the first year. The assurance for the current year is broadly in line with the market. Further, it must be kept in mind that the closed end MIPs are at a disadvantage because the fund has to pay out 22% dividend tax. Thus, if you are not in need of a regular income, opt for the growth option for a tax efficient investment strategy.
While MIP 2001 will come up for redemption on March 21, 2006, it will offer repurchase to investors after three years starting February 22, 2004. While redemption upon maturity would be at NAV or par value (whichever is higher), the capital is not guaranteed on repurchases prior to the redemption date. While a predominant part of the investment would be in placid debt instruments, even the bond markets have been plagued by intermittent volatility in recent times. Further, investments in equities will add to the volatility of the fund. Thus, investors run the risk of losing a part of their initial capital if they opt for repurchase. While the scheme is listed on the WDM of NSE, trading is far too few and is often at a discount to NAV.
Investors today have a number of flexible options including new generation MIPs. These open-end MIPs offer liquidity to investors at NAV related prices. While not assuring returns, these funds strive for a regular income payout with a greater flexibility of periodic payouts - monthly, quarterly, half-yearly and annual options.
With their investment objective similar to their closed-ended counterparts, open-ended MIPs are a better reflection of the markets. Investors who lay a premium on assured income ought to also weigh the liquidity implications of the UTI MIP series, against the open-ended nature, better service standards and flexible options from the new generation MIPs.