The Hindu Business Line : MIPs — rough road ahead?

WILL their exposure to equities put MIPs (monthly income plans) at further risk if the stock market goes down after the election results are announced? That's a question MIP investors are asking themselves, scared as they are by the prospects of downward movements on the exchanges. And going by the returns recently generated by these schemes, their concerns are not unfounded.

As the numbers indicate, the average returns have been coming down progressively.

MIPs, which gave a decent 15 per cent-plus for the year ended April 30, 2004, have turned out a disappointing show if one considers their six-months, three-months and one-month performance.

Returns for these time periods are 4.78 per cent, 2.12 per cent and 1.06 per cent respectively.

MIPs, as everyone knows by now, invest a small portion of their assets in equities, while the dominant portion is parked in various debt securities.

The schemes have done well in recent times, largely because of their allocations to stocks that have moved up on the bourses.

The same is not happening at the moment and investors are worried that equities may actually fall in the days just ahead.

Among the better performers in the MIP category is the product run by Alliance Capital. Launched in 1999, it is the oldest of its kind.

It has clearly stolen a march over many others because of what investors say are two basic reasons: Conservative debt management and active handling of equity.

As on March 31, 2004, the scheme had large exposure to bonds/NCDs (38 per cent) and g-secs (37 per cent). Its one-year and three-year returns (as on April 30) were 21.69 per cent and 15.2 per cent — critically higher than the periodical averages.

The interesting point is that the Alliance MIP portfolio has a serious equity component as well. It investments include such frontline stocks as Bharti, Tata Motors, Cadila and Reliance. These, as well as the others, have helped the scheme deliver above-average returns.

Most MIPs, in fact, have demonstrated a certain dependence on equities in recent times. Considering the lackadaisical debt scenario, some fund houses have even gone to the extent of increasing the equity ceiling for MIP variants.

The likes of Principal, Birla Sun Life, Tata MF and now DSP Merrill Lynch have their own schemes in the `MIP Plus' category.

MIPs managed by HSBC and ING Vysya have more than one option, each with a different limit on equity allocation.

With the creation of more room for equities, the new ones may well turn out to be far more aggressive players — a possibility that many investors are betting on.

However, it needs to be remembered that MIPs do not provide guaranteed returns, the `monthly income' tag notwithstanding.

As investment circles indicate, MIPs happen to be a part of life for a large number of investors. Any critical change in the market's perception can have an adverse impact on inflows into these schemes.

Investors, especially the retail variety, have entered them with the hope of getting more than what debt funds were expected to provide.

They will be disappointed if market conditions become worse in the days to come. Discerning investors can, ahead of election results, consider switching out to less risky options.

Feedback may be sent to blcal@vsnl.net

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