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Switching From Bond Fund to MIP

With dwindling returns in income funds, should I shift from vanilla debt funds into Monthly Income Plans (MIPs)?

With dwindling returns in income funds, should I shift from vanilla debt funds into Monthly Income Plans (MIPs)?
Shreedhar Archik

Under current circumstances, majority of income fund investors would be thinking on the same line. But are you aware of the pros and the cons of such a move? In a rising equity market, this may be a good idea but if equity markets tank, it can affect your returns as well as your goal. So, first make up your mind as to what you want from your investment. Both categories of funds are meant for different set of investors. br>

Calendar Year Returns (%)
Year  1998  1999  2000  2001  2002  2003*
Debt: Medium-term 11.03 13.43 10.66 16.67 15.7 6.54
Hybrid: MIP 11.94 14.71 9.33 12.76 12.15 12.18
*till December 12, 2003

Ideally, both income fund and MIP have a debt-focused portfolio. But MIPs have a small equity exposure (a maximum of 15 per cent generally), unlike income funds. Income funds are suited for cautious investors who want stability above returns. On the other hand, MIPs act as enhancer to a debt portfolio and subsequently, they have a higher downside risk vs income funds. For instance, during the volatile first quarter of 2003, an average income fund was down 0.02 per cent, but an average MIP lost 0.13 per cent. Even, in the past three calendar years, income funds have posted better returns than MIPs.

You seem to have been attracted by the recent surge in the equity markets and the subsequent rise in the NAV of many MIPs. Perhaps, you are also concerned by the volatility in the debt market. But these are short-term issues. Over the long-term, income funds will not give you sleepless nights, but MIPs have the potential to do so as the equity portion can be volatile. Thus, if you are a cautious investor and have an investment horizon of over a year, we would suggest you to stick with your income funds.

But if you are not convinced and think that equity market will continue to rise for a while, look out for a conservative MIP, which generally maintains a low equity exposure of say below 5 per cent. But before that, re-evaluate your risk-taking ability and act accordingly.

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