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Suresh Krishnamurthy

INVESTORS in the Monthly Income Plan of Alliance can consider exiting the fund as its performance may be vulnerable to changes in taxation and the ownership of the asset management company.

Other than the UTI schemes, Alliance MIP is one of the largest schemes in its category. It is also one of the better performing funds.

The recommendation by the Kelkar Task Force that interest and short-term capital gains be taxed will affect income and balanced funds. The MIPs' focus on income generation may mean that tax incidence in their case could be higher if the proposals are implemented.

As regards management change, Alliance Capital, the US-based investment management firm and promoter of Alliance Capital India, has appointed advisors for finalising the sale of the asset management company in India. The implications of such changes are not clear. It could be adverse if it leads to changes in investment strategy.

Suitability: MIPs need to be viewed as income funds with a small blend of equity. In fact, the name Monthly Income Plan is rather misleading as they are more in the nature of hybrid funds investing in both debt and equity. It is a riskier alternative to debt funds and less risky than the conventional balanced fund.

Performance: Generally, the performance of the MIPs has not been impressive. Last year, Alliance MIP with a weight of around 10 per cent in equity, returned 13.5 per cent. In the comparable period, a large number of bond and equity funds returned upwards of 14 per cent.

The performance of Alliance MIP has not exactly been poor. However, as an alternative to investing 90 per cent in bond funds and 10 per cent in equity funds it fares poorly. For example, an investment at the beginning of the year of 90 per cent in Alliance Income and 10 per cent in Alliance Equity would have fetched returns of 14.5 per cent. This despite the fact that Alliance Equity under-performed many of its peers.

The relatively inferior performance may have had to do with the shorter average maturity profile of their debt portfolios. MIPs are forced to hold shorter-term debt because they need to reduce risks to ensure regular dividend payments.

Portfolio allocation: At the end of December 2002, the fund was largely invested with cash position accounting for less than 5 per cent of net assets.

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