In rising stock markets, diversified equity funds emerge as top-of-the-mind investments, while hybrids like balanced funds and monthly income plans are relegated to the sidelines.
A category of hybrid mutual funds, they keep your boat steady during equity downturns
In rising stock markets, diversified equity funds emerge as top-of-the-mind investments, while hybrids like balanced funds and monthly income plans (MIPs) are relegated to the sidelines. That is most unfortunate, for hybrid funds, powered by their flexibility to invest across asset classes, can add immense value to the investor’s portfolio, especially during a downturn. And while the role of balanced funds in the investor’s portfolio has been well-documented, it’s time investors recognised the value MIPs could add.
What are MIPs?
MIPs invest predominantly in debt instruments with a small proportion of the assets allocated to equities. The equity component provides MIPs with just the edge they need to outperform conventional debt funds. The equity component usually varies between 5-30% of assets.
A noteworthy feature of MIPs is the wide range of options available to investors. Effectively, MIPs provide investors with the opportunity to invest in line with their risk appetites.
Why invest in MIPs?
1) Investors with a low to moderate risk appetite are often seen investing in diversified equity funds or even balanced funds. The mismatch between the investor’s risk appetite and his choice of investment is evident.
MIPs with a lower equity component (less than 20% of assets) can prove ideal for such investors, provided they have a minimum timeframe of 18-24 months. The equity component acts as a ‘kicker’ and provides MIPs with an edge over conventional debt funds. Since the equity component is capped, this ensures that the MIP does not take on more risk than it should.
2) When the equity markets are in a rally, a lot of investors are invested mainly in equities/ equity-oriented funds. So, when equity markets turn volatile, they are often caught wrong-footed. In such a scenario, the debt component of the MIP can stabilise their portfolios.
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