Are MIPs of mutual funds a safe bet?

Varun, my 15-year old nephew, normally doesn't bother about money. You wouldn't expect him at his age either since his money management is restricted to pocket money. A few days ago, he wanted to know if his grandparents too dabbled in stock market. He had just figured out that stocks gave huge profits. At least that's the message he got during one of the chats with his friends.

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In the next few years, you can expect stock market to be the centre of discussions at almost every place. Hardly surprising when indices are bringing in cheers to many. Even those who invested in Sensex when it hovered at around 21K and felt foolish in the next 12 months too are beginning to feel optimistic. The portfolio losses (even if they were notional) have begun to look acceptable in single digit when they looked eroded a few months ago.

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Even though Sensex is still far away from previous highs, the swift recovery of more than 100 per cent in tough economic conditions has once again revived hopes for equity in general. Expectedly, fresh set of investors including senior citizens are likely to get tempted to have a go at the equity.

For senior citizens, particularly for those dependent on regular flow of income, the choice of equity is not a comforting thought. In fact, such investors should not go beyond MIPs (monthly income plans of mutual funds) for equity exposure. Even those who look at MIPs, should do so after taking into account their necessary cash flow.

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Are they safe?

The name in the case of mutual funds can be misleading as it gives an impression that the product ensures (fixed) monthly income to investors.

The fact that other institutions like post office too has similar product adds to the confusion. Investors need to keep in mind the fact that though MIPs of mutual funds give income on a regular basis, the same is not guaranteed as MFs are not allowed to do so.

As a result, the income earned from investment can vary on a monthly basis and even carries risk because of equity exposure. The comforting fact is that the equity allocation varies from 10 to 30 per cent and investors can choose according to their comfort.

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Better option now?

When markets are on the rise, MIPs find favour and hence, are once again worth an option for many. As you are aware, the stock market staged a smart recovery in the last 6-8 months and the worst seems to be over for markets across the globe.

This gives a comfort for investors as they can expect the going to be good in the next 2-3 years for markets across the globe. Those who prefer debt too would have to look at MIPs as returns from debt products have begun to look unattractive. With one-year deposit carrying an interest tag of less than 8 per cent, the yield is unattractive from this product.

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On the other hand, even if MIPs allocate 20-30 per cent towards equity, they have managed to post good returns in the last one year. However, one should not hope for a 20 per cent returns from the product over long term and instead should be happy even if returns are in the range of 12 per cent, which is the case over long term.

Review allocation regularly:

Unlike an FD, allocation to MIPs required review and hence, profit booking and exit should be part of the strategy. It would be prudent to book profits at regular intervals or when markets touch euphoric heights. For instance, those who put money at current levels can target to book profit in 2011.

Good for whom?

No single product fits all. So is the case with MIPs. I wouldn't recommend a young investor to go for MIP simply because his risk appetite should be higher. On the other hand, MIPs can be an option for those who have retirement corpus but have already taken care of their fixed monthly expenses. It is not a bad option even for those who park funds in debt as part of allocation.

Srikala Bhashyam is the Managing Partner of RS Consultants. She runs an investment-consulting firm in Bangalore to provide consultancy in the areas of financial planning and media. In the last 15 years, she has worked with top publications in different locations. The primary focus of all her columns is to simplify the nuisances of Finance, which has attained a new look over the years. Besides being a columnist, Srikala has also been closely associated with some of the prestigious book projects.

The author can be reached at srikala.bhashyam@gmail.com

The views expressed in the article are the author's and not of Sify.com.

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