Those with a low-risk appetite who want an 'equity icing' can go in for MIPs. Any savings instrument that contains equity has turned sour for investors following the 2008 markets crash. But there is one mutual fund product, Monthly Income Plan (MIP), launched in 2000, which has held on despite having exposure to equities.Although MIPs have posted negative returns both in nominal and real terms, experts reiterate a reconsideration of the offering as an investment option.
What are MIPs?These funds were launched with the objective of providing regular income to the investor. Dividends, if any, were paid out of investment profits at periodic intervals - monthly, quarterly or half-yearly. The regular income objective could be achieved by investing at least 75% of the assets in good quality fixed-income instruments and the rest in equities. The less-risky funds restricted equity exposure to 10% of the assets.
Who should invest?MIPs' target segment includes retired people or those nearing retirement. The offering could be a good solution for those who want to invest in safer assets and still want some 'equity icing'. The risk profile of these funds places them in the space between income and balanced funds, which in turn attract those with low-risk appetite. Those who prefer to have low-risk investment and still want to participate in an upside, if any, may consider investing into an MIP.
What does one expect?In an age of turbulence, most of us are not sure where equity will head. Though most experts reckon that equities are quoting at bargain prices, it is difficult to go for them. In such circumstances, MIPs can emerge as a preferred means of getting equity exposure. In a falling interest rate environment, MIPs could deliver good returns going forward.
Possible adversities:
Only a few offerings in the market have maintained consistency in paying dividends. The pressure to deliver regular returns means that fund managers cannot take any long-term bet, and hence, the participation in upside remains limited. A postal monthly income scheme, which offers guaranteed returns, scores over MIPs when returns are uncertain.The fixed-income investments carry credit and interest rate risk. Fund managers are pressurised to perform in both the asset classes - equity and fixed income - which, in classical sense, are expected to move in opposite direction.Being on the right side matters. The extent of equity exposure a fund is allowed to take and active management of equity exposure primarily decides the excess returns generated by the fund. A 10% cap on equity exposure may appeal to investors because of the limited downside seen during bad times. But, the same would appear as a dampener as markets recover. There is a set of investors who would prefer to keep things simple by buying into a diversified equity fund and an income fund, where the proportion of investment in each is decided by the investor and the investor can enjoy the best of both the offerings.
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