The Hindu Business Line : MIPs in minus zone

"EQUITY KICKER", the prospect of high monthly returns, was the favourite term of asset management companies that launched Monthly Income Plans (MIPs) with higher equity caps. Between December 2003 and March 2004, while the Sensex was testing 6000 plus levels, asset management companies announced a slew of MIP products with higher equity kickers.

However, contrary to expectations, MIPs are floundering at the lower end of the returns' basket and those with higher equity components have posted lower returns.

IL&FS Asset Management Company, whose funds are now part of UTI Asset Management Company, was one of the first to announce MIPs with 25 per cent equity cap in December 2003.

Three month average returns for the sector in MIPs are - 0.55 per cent. Nearly all the high-equity funds have performed well below this average. Pure debt funds have posted nearly one per cent return in the same duration.

While most MIPs have managed to pay dividend in the monthly option for May by using the buffer that had been built, market indications suggest that some MIPs may be skipping dividends for June.

Fund composition has also changed and MIPs are cutting their equity exposure significantly. ING Vysya Mutual Funds, MIP Plan B has cut its equity exposure to 10 per cent; the equity cap on the fund is 20 per cent, according to Mr Ashim Syal, Chief Investment Officer, ING Investment Management (India).

Similarly, equity exposure of Birla MIP is 11 per cent (cap - 15 per cent) and that of Birla MIP II Wealth 25 is 14 per cent.

"Birla MIP has paid dividend for May at the same rate as previous months. We have sufficient cushion to continue our dividend payment," said Mr K. Ramanathan, Fund Manager, Birla Sun Life AMC.

In contrast, the high equity MIPs, launched earlier this year, have not had enough time to build up enough buffers to see through the slump in the equities market.

Distributors confirm that while this product category was the darling of the industry in the first quarter of the year, investor excitement has waned considerably. "The message while launching MIPs was that of providing with additional income to enable investors in making payments towards club fees, car loan EMIs etc. There was a passive assurance of returns, this promise is getting tested now," said a retail distributor.