It's been quite a journey for Monthly Income Plans. From occupying centre stage in 2004, the segment now seems to have slipped into oblivion. Not too long ago fund houses were promoting MIPs as the next 'big' thing and investors were happy lapping up new offerings. Clearly the unprecedented ascent in equity markets has changed perceptions for both investors and fund houses alike. So can MIPs add value to investors and should they find a place in investors' portfolios?

What are MIPs?

MIPs are debt-oriented funds with a mandate to invest a portion (generally upto 20 per cent) of their assets in equities. They operate on the proposition of combining the power of equities with the stability of debt. As the name suggests, MIPs are intended to offer monthly income. However like other market-linked investment avenues, this income is not assured. The distribution of income (in form of dividends) is a factor of availability of distributable surplus.

The history

While MIPs have been in existence for some time now, they shot to fame towards the end of 2003. Debt funds (powered by incessant interest rate cuts) ruled the roost then. However with interest rates stabilising, the debt funds segment ran out of steam. Around the same time, equity markets had started looking up after a prolonged bear phase. An offering, with a pre-dominantly debt component and a sprinkling of equity, seemed like the perfect foil for the situation.

However the segment was soon plagued by its fair share of problems. Market conditions were far from conducive for a pre-dominantly debt product. Debt markets continued to fare poorly and equity markets experienced a fairly volatile phase. The result was evident in performance of MIPs. Most funds skipped their monthly dividends, much to the dismay of investors.

Disgruntled investors complaining about the performance of their MIP investments was a common sight. This had more to do with mis-selling by mutual fund agents, than with a flaw in the product. Some agents were guilty of touting MIPs as products offering assured returns. As a matter of fact, the name itself - 'monthly income plan' lends credence to the view that there is distribution of monthly income/dividend.

The ensuing period saw equity markets soar to record highs. Diversified equity funds emerged as the most preferred investment avenues and MIPs went out of reckoning.

The offering

Hybrid funds (like balanced funds and MIPs) offer investors the opportunity to diversify their holdings across asset classes i.e. debt and equity. This in turn implies that their portfolios are better equipped to keep volatility at bay and are also geared up to benefit from a gain in more than one asset class. Powered by this kind of flexibility, hybrid funds should find a place in just about any investor's portfolio.

A 5-step investment strategy for MIPs

MIPs are typically suited for investors with a low to modest risk appetite. Investors who would have typically invested in debt funds or assured return instruments like fixed deposits can consider investing in MIPs if they are willing to take on a higher degree of risk for clocking better returns. Another edge MIPs have over conventional instruments like fixed deposits is liquidity.

The performance

Monthly Income Plans	NAV (Rs)	1-Mth (%)	3-Mth (%)	1-Yr (%)	Debt (%)	Equity (%)
UTI - MIS ADVANTAGE (G)	13.13	2.73	5.89	20.96	77.0	23.0
HDFC MIP LTP (G)	13.57	1.98	4.67	20.72	75.6	24.4
PRUICICI INCOME MULTI. (G)	13.00	2.20	4.34	19.73	75.3	24.7
RELIANCE MIP (G)	12.51	1.03	4.00	18.06	85.4	14.6
BIRLA MIP II - WEALTH 25 (G)	12.57	1.80	4.56	16.05	80.5	19.5

Clearly, MIPs have clocked attractive returns over the last 12 months. A striking feature in the top performers is that, most of them have rather high (around 20% of assets) equity allocations. MIPs have successfully ridden the rising equity markets. Another notable feature in portfolios of leading MIPs has been management of the debt portfolio. MIPs have countered the unfavourable conditions in debt markets by investing in floating rate instruments and holding debt instruments with a low maturity. This brings us to another aspect of MIPs – the large number of variants.

The MIP segment contains schemes that have an equity component ranging from 5% to 30%. Hence investors have the liberty to choose a scheme that best matches their risk profile and investment objectives.

Should you invest in MIPs?

The answer to that question would be an emphatic yes, but with a disclaimer. Notwithstanding all the advantages that an MIP can offer, investors must consider the nuances of investing in the segment. Firstly, investors must appreciate the fact that MIPs don't offer assured returns.

Secondly, comparing returns clocked by MIPs with other products like balanced funds (which have a significantly higher equity component) is unfair and should be avoided. Finally we recommend that investors opt for the quarterly dividend option which can enable the fund manager to declare a dividend consistently; the same may not be possible on a month on month basis.

Powered by their ability to diversify across asset classes and offer investors with a low-moderate risk appetite the opportunity to access markets, MIPs can find a place in most portfolios.

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