Monthly Income Plans in Mutual Funds
Small investors are perpetually in search of investment avenues that give regular and high returns. Many investors, particularly, small investors, face this challenge. An interesting option available, that is good in today's markets, is the monthly income plans (MIPs) floated by various mutual funds. Many investors are opting for MIPs. MIPs are hybrid investments that invest a minor portion of their portfolio (around 15-25 percent) in equity, and the balance in debt and money market instruments such as bonds, certificates of deposits etc. The equity component acts as a catalyst and gives extra returns.
Generally, MIPs offer safety, higher returns, tax efficiency, active management of debt-equity allocation, and liquidity. Of late, investments of these plans in equity have increased. Mutual funds have been focussing on the retail segment. MIP is rated as among one of the best products available to the individual investor. MIPs are ideally suited for investors looking for a steady monthly income.
With the Sensex delivering good returns in the last six months and showing a strong bullish trend, MIPs that declare frequent dividends have caught the attention of investors. It provides a monthly income to investors depending on the option one chooses – dividend or growth. Dividends are issued generally monthly, quarterly, half-yearly or annually.
MIPs come with a growth option as well. But an investor opting for growth has to forego frequent dividends and the entire returns are in the form of capital appreciation only. MIPs with the growth option attract high net worth individuals, institutions and trusts, among others. Investors investing in MIPs should give priority to steady returns rather than look for quick and large returns. Hence, conservative investors go for MIPs.
As with other schemes, the returns from even these schemes are not guaranteed. The expected rate of return is as variable as in other schemes. However, going by the nature of these schemes, investors can expect a reasonable rate of returns, ranging between seven and 12 percent. This is, in any case, more than the interest rates offered by banks on term deposits.
The returns in these schemes are dependent on the performance of the economy and the corporate sector, as well as on movements in the stock markets. There are no guaranteed returns. However, the equity component of the fund could make all the difference. With good growth in the corporate sector, the returns on MIPs will also go up.
The performance of corporates is directly and immediately reflected in the stock market movements. Investors have the option to invest directly in the equity markets through stock exchanges. Alternately, they can invest through a more secure mode in the equity markets through mutual funds.
For a cautious investor, who is nervous of investing in the equity markets, it is best to either invest in balanced funds or in a MIP. These plans have the option to invest up to a particular percentage of the corpus of the fund in equity. The balance is set aside in debt products.
MIPs are good for all segments of investors. They come with various options. You can either opt for a monthly income or for a growth option. MIPs may be the right product at this juncture because of their portfolio mix of equity and debt. You can earn more returns from equity. The debt returns may fall further because of the expected large government borrowings in the next financial year. This may drive bond yields up, and push down returns from debt options.
One should keep a track of the portfolios of these schemes and their performance. As inflationary pressures creep in, yields on bonds may move upwards which in turn will put pressure on returns generated by fixed income instruments. Though equity looks good as an investment in the long term, a sharp correction in the short term may be expected. Also, investors need to keep in mind the fact that MIPs assume equity will give extra returns, but that need not be the case always.
Source: Economic Times
