The open-end Monthly Income Plans are totally out of equities today. With a drifting equity market and the sustained rally in bonds, the reason seems obvious. Despite a mandate to invest up to 15% of their assets in stocks, the latest portfolios reveals that all MIPs, barring Alliance are fully in debt. Alliance MIP holds a conservative 6% exposure to equities, which is also well below the ceiling.
Not only have they shunned equities, these funds show ultra-conservatism with their bond portfolio too - with their maturity profile and exposure to government securities. For instance, SBI MF's Magnum MIP has a nil investment in gilts with an average maturity of 3.26 years. On the other hand, the AMC's debt fund has nearly 40% of its assets in sovereign bonds with a portfolio maturity of 5.17 years. It is no different with most other monthly income plans. This has resulted in lower return from MIPs than bond funds.
Investors expectation from MIPs is driving the extra cautious approach of the MIPs. When investing in MIPs, we still relate to UTI's closed-end MIPs which gives guaranteed return through post-dated cheques. This makes it almost like a bond giving steady returns. However, being open-end and without guarantee, these funds have to be consistent performer on a month-on-month basis.
With equities in doldrums, even a marginal exposure could prove fatal and impair the dividend paying ability of MIPs. "We do not want the volatility in equity market to impact the dividend declaration capability of monthly and quarterly plans," says Nilesh Shah at Templeton AMC. "We pitch MIP as a conservative risk; conservative return fund and take equity exposure only in half-yearly and growth options,'' he adds.
It is early days for most open-end MIPs with the oldest MIP being just about two-year old. And in this period, they have been able to build a modest track record of their ability to give steady monthly dividend, despite a turbulent market. Volatility apart, MIP got lot of bad press when a few funds skipped dividend last year. Perhaps, that has driven fund to avoid taking even small chance to boost returns. To an extent, funds still have to create greater awareness about the precise risk-return characteristic of MIP. And the fine print which says that MIP is just the name and intent and not a guarantee, should be in bold.
MIPs abstaining from equities the right strategy? Yes and No. Yes, because it helps deliver steady returns if not high return. No, because if the markets turnaround, these MIPs will gain late entry.
The Right Choice
If you are invested in an MIP to earn regular monthly income, it pays to invest in a conservative fund. But if you invest in MIP considering it a conservative investment to earn superior return than a bond fund, then choose among the Alliance MIP or Templeton's Growth option, which sustain their equity position in all market.