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A Matter of Choice

Would it not be better to take 85 per cent exposure to HDFC Income Fund and 15 per cent to HDFC Equity rather than investing the whole amount in HDFC MIP?

Would it not be better to take 85 per cent exposure to HDFC Income Fund and 15 per cent to HDFC Equity rather than investing the whole amount in HDFC MIP?
Rajiv Krishnan

There are several dimensions to this riddle. If we look at this from the point of view of returns then this combination or for that matter any combination of a good equity fund with a debt fund should generate better returns than a Monthly Income Plan (MIP). The most probable reason for this is that the equity component of a MIP is generally used to enhance returns and is managed with a lower return expectation than a pure equity fund. Conversely, this engineered combination could also take a greater hit in bad times.

If we look at such an engineered combination from the tax viewpoint, it is likely to be far less efficient than MIP. A MIP by virtue of being a mutual fund is not subject to capital gains tax on the buying and selling of its securities. When you try to rebalance the engineered combination it will be subject to capital gains tax. In the short-term, this can be as high as 30 per cent, while in the long term it will be 10 per cent. This can eat substantially into the extra returns that the engineered combination would generate.

Being the fund manager of this MIP you will have to monitor it from time to time to take a decision to rebalance. Even if you mechanically rebalance at some fixed time period, this will require an effort on your part. One of the less mentioned benefits of mutual funds is convenience and in the attempt to generate better returns you would miss out on this.

At the end of the day if you desire higher returns, increasing the equity allocation in your portfolio could be a more convenient and practical approach. Otherwise a MIP does a fine job of boosting the returns from a pure debt portfolio.

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