Monthly Income Plans are essentially debt funds, aimed to provide regular income. It also has marginal equity allocation, for the purpose of generating capital appreciation. Apart from being open-ended in structure, the new generation MIPs, do not assure returns. With interest rates on the downhill over the past few years, the returns from fixed deposits and debt funds have taken a hit. No wonder, the investor has been yearning for a product, which earns him a higher return. MIPs, with their marginal allocation to equity, have come as a perfect answer. While the debt allocation yields in line with the prevailing interest rates, the equity component peps up returns, yielding better inflation adjusted income.

Besides, the varying dividend options/withdrawals further add to the liquidity of the fund. The advertisement of a recently launched MIP "Why pay your recurring expenses when your investments can?" rightly explains the utility of the fund. However, it is not always a smooth sail with an MIP.

Just as equities bring in higher returns, they also put you on a higher risk platform. Though these funds have a lower allocation to equity, even a 15-20 per cent investment is sufficient to give jitters. A case in point is Alliance MIP. The first open-end MIP, it yielded an annualised return of 45.7 per cent till February 2000 with an average 7 per cent investment in ICE stocks. While the fund doled out generous dividends, the size of the fund vaulted by a whopping 950 per cent within a year of launch. However, the dream run for the fund came to a grinding halt in March 2000 with the downturn in the ICE stocks.

Though the past few months have been very turbulent for both equity and debt markets, the average returns of the debt funds have far outpaced that of the equity funds. Consider the average 3-month return of Value Research category of diversified equity funds for period ending June and September 2000. The NAVs saw infuriating erosion of 17 per cent and 12.3 per cent respectively.

However, the category of medium-term debt funds for the same periods had returned 2.63 per cent and 0.94 per cent respectively. The one-month ending October also saw the debt funds continue to steal the march, returning an average 0.96 per cent whereas the diversified equity funds saw a further erosion of 6.66 per cent.

No wonder, MIPs with equity component have failed to match the performance of those MIPs, which were fully invested in debt instruments. With equities being knocked, the monthly and quarterly dividend options across MIPs saw a sharp drop in the payout. For instance, though Alliance MIP has not skipped a dividend, the monthly dividend option paid a mere 0.3 per cent and 0.4 per cent for September and October 2000, respectively against an average 1 percent monthly dividend doled out till August 2000 (0.9 per cent for July).

To top it, the fund had given a 10 per cent special dividend in April at the back of bountiful returns during the heady days of equity markets.

Similarly, Sun F&C MIP paid a moderate and only dividend of 0.9 per cent in its monthly and quarterly dividend options in July 2000. However, with the NAVs of both dividend options ruling below par, it has been forced to skip subsequent dividends. Launched in March 2000, Sun F&C MIP had maintained an average 8% allocation to equities. Now consider the monthly returns by the funds. Alliance MIP, in its growth option, gave an average monthly return of 3.68 per cent for the first seven months till February 2000. However, the average returns were washed away and even dropped to (-) 0.05 per cent in the next eight months till October 2000. Templeton MIP, on the other hand, has emerged absolutely unscathed. Launched around the peak lvels of the markets in February, the fund, in a calculative move, waited till July to pick its equity investments at relatively attractive levels. The growth option of the fund has put up a comfortable average monthly return of a 0.5 per cent between March and October 2000. However,there are quite a few MIPs pthat have yet to invest in equities.

For instance, Templeton MIP until October 2000 had no allocation to equities for its monthly and quarterly dividend options. Similarly, Reliance MIP, which was launched in September, has yet to pick up equity stocks. As a result, the returns of these funds have been very much close to conventional debt funds.

Parameters
While investors of Alliance MIP would have experienced the volatility in their fund, it is important for the investor to evaluate his preparedness for risks, which come with equities before opting for an MIP in his portfolio. Make sure that you are comfortable with the upper limit that the fund has set for its equity investments. All funds, except Kothari Pioneer MIP (20 per cent limit) have so far set a 15 per cent limit for their equity investments.

Further, there is no denying that a concentrated equity portfolio would be more volatile than a diversified one. All the MIPs, that have investments in equities, have tilted their portfolios in favour of the ICE sector. Of the average 7.8 per cent exposure to equities, around 5.5 per cent is invested in the ICE sector, with Alliance MIP and Sun F&C MIP each having a 5.8 per cent allocation while Templeton MIP has 5 per cent of its assets in technology counters.

While any changes in the returns from MIPs would be more because of the equity portfolio, investors need to have a long-term horizon to be able to iron-out the volatility in equities.

Further, investors would do well by opting for the growth option and go for systematic withdrawals after one year of investment, which will result in a nominal capital gains tax. On the other hand, a dividend option will entail the burden of 22 per cent dividend tax. While none of the MIPs carry any entry load, they do charge an exit load ranging between 0.5 per cent to 1 per cent for redemption within 3 months to one year. Value Research