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Myths about MIPs debunked!

Many of you investors under the desire to earn a "monthly income" from investments invest in Monthly Income Plans (MIP) from various mutual fund houses, without really studying the product well, nor even assess the track record (both - performance as well as dividends) of the plan in which you intend investing. And to further mystify the issue, your agent / distributor / relationship manager advises you to invest in them, knowing the fixation that you are looking forward to a "monthly income". But have you really questioned your agent / distributor / relationship manager on how this product (MIPs) really works and whether it suits you? The answer is No! And even if you have questioned, most of the agents / distributors / relationship managers, they  would be parting with insufficient information (in order to safeguard there own interest of earning more commissions!), thereby leading you to make incorrect investment decision, which may not suit your profile.

Yes sure, you may ask "how?" and herein paras will answer that for you.

No assurance on "monthly income": Yes, even though the MIPs (from various mutual funds houses) have been fancily named as "Monthly Income Plans"; they do not assure any monthly income for you. All these names in our opinion are perfect for the marketers but absolutely imperfect / inappropriate for you investors. Yes, they are misguiding!

Please recognise that though MIPs work with the explicit objective of generating regular income for you investors, by outperforming pure debt investments along with the help of an 'equity push' (debt to equity composition in their portfolio is generally 75:25), they actually do not assure of any "fixed returns".

Some of you may be wondering what happens if you opt for the dividend option. Yes, as far as the dividends are concerned they too aren't mandated to be declared on a regular basis. So, even if you opt for a monthly or quarterly dividend option, there are possibilities you may not receive them regularly at the specified interval (i.e. monthly or quarterly), thereby landing you in the wrong lane.

Please recognise that dividends in MIPs, as with other mutual fund categories, are declared only if there is adequate surplus generated by the fund to declare the same.

Now, that your myth of a "regular income" from MIP (from mutual funds) is debunked, let's take a closer look at what are MIPs actually are and who would benefit from them.

What are they?
MIPs are debt oriented hybrid funds with a small equity component. MIPs generally invest 0% to 25% of its assets in equity and equity related instruments and the balance (i.e 75%) in debt and money market instruments. So, a major portion of their portfolio earns stable income from the coupon payments, thus providing safety and stability; the small portion of equity on the other hand, adds a zing to the overall portfolio by enabling the fund to benefit from capital appreciation and off course earn dividends from its stock holding. But a noteworthy point is, during the downside of the equity markets an MIP can take toll on the returns front; and this especially true in the case of an MIP having a dominating portfolio in the mid cap segment in its equity composition.

Hence broadly, MIPs serve as a dual purpose of safety as well as an ability to earn higher returns through the equity push.

Who would benefit from them?

  • Conservative investors: If you are an investor, who isn't willing to take more risk (i.e. your appetite for risk taking is low), but need an investment product with the potential to add value across market conditions, then this product would do well for your portfolio (due to the typical debt to equity composition of 75:25 followed by them).
  • If you intend beating the inflation rate:As an investor, if your objective is to beat the average annual inflation rate, but at the same time be risk averse, then too MIP can do good to your investment portfolio. As MIPs generally deliver returns in the range of 6% - 10%.
  • Cash flow from investments: All those investors who want to obtain cash flows from their investments (in the form dividends) but do not expect them to be consistent in amount and / or in the form of their consistency in which they are defrayed can opt for an investment in MIP.
  • Retired persons: For retired individuals, instead of making random withdrawals from their nest egg, they too can invest in MIPs to have a flexible income stream.
Article Soure: Article has been sourced from PersonalFN is providing unbiased and independent research on Mutual Funds in India.

Disclosure: I am long DSS.