Surprise: MIPs raked in big bucks since August

“Sebi killed the mutual fund,” fund houses would have us believe, off the record.

Can’t grudge them that.
After all, since August 1, 2010, when the no-entry-load regime took effect, equity mutual funds have seen an outflow of Rs 7,970 crore, with monthly redemptions far exceeding inflows on seven out of nine occasions.

“No commissions on offer, so agents are not selling,” goes the industry refrain.

But if this was indeed true, how come the monthly income plans (MIPs) offered by the same mutual funds have been selling like hot cakes?

As on July 31, 2009, the assets under management of 41 MIPs stood at Rs 4,832 crore.

That’s up a whopping Rs 12,425 crore from Rs 17,257 crore on April 30, 2010, the last time the numbers were declared. Take out the Rs 425 crore or so generated as returns and MIPs have still seen an inflow of around Rs 12,000 crore since the MF industry went no-load.

MIPs are hybrid investment products that invest the bulk of their assets (75-95%) in debt and money market instruments and the balance in equities.     

The debt investments ensure stability and consistency, while the equity portion boosts the returns.

These funds are suited for conservative investors who are looking
for slightly better returns than bank fixed deposits or pure debt fund offerings. The name MIP, though, is a misnomer because these plans do not guarantee a monthly income and it is merely a hangover from the days of the assured-return schemes offered by the erstwhile Unit Trust of India.

“The returns last year have been good in these hybrid products, aided by equity markets’ surge. This back-view mirror approach has prompted many of the retail investors and HNIs to go for MIPs,” said Surajit Misra, executive vice president & national head - mutual funds, Bajaj Capital.

“MIPs have seen favour with investors as they offer a little more than normal debt or fixed income products because of addition of equity component, which may give higher returns in favorable market conditions. At the same time, lower equity exposure prevents capital erosion in uncertain times” said Satyabrata Mohanty, head - mixed asset investment, Birla Sunlife Mutual Fund.

With equities at the upper end of valuations and future short-term
performance uncertain, investors have lately been cautious in investing in pure equity schemes.

“Investors are wary of investing in pure equity products because of extreme choppiness in the markets after they ran up too fast. The MIPs offer capital protection in terms of investing in short-term debt instruments, which give 6-7% kind of annual returns,” said Ritesh Jain, head - fixed income, Canara Robecco.

MIPs have given an average return of 11% over the last one year, as on May 14, 2010. During the same period, fixed deposits (FDs) have given a return of around 7-8% before tax. The post-tax return on FDs would thus be even lesser.

In case of MIPs, the long-term capital gain (for any holding of one year or more) is taxed at the rate of 10% without indexation or 20% with indexation, whichever is higher. Indexation allows the investor to take inflation into account while calculating his cost of purchase. This ensures that the post-tax return of MIPs is around 8%, whereas the post-tax return of an FD for an investor in the 30% tax bracket would be around 5-5.5%.

Going forward, experts believe that with the equity markets remaining volatile and interest rates rising, the returns on MIPs may reduce to more normal historical levels of around 8%.

“The rising interest rates would affect the debt investment returns. The best part for these MIPs seems to be over and the inflows may slow down in next 2-3 months. Investors with horizons of 2-3 years can expect to receive 8-10% returns hereon,” said Misra.
The key takeaway, however, is that mutual funds have been able to push MIPs even without entry loads. So, when the time is right, they may be able to push equity funds, too.