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Suresh Krishnamurthy

INVESTORS in Monthly Income Plans (MIPs) can consider reducing their exposures. This recommendation will apply to MIPs such as Alliance MIP, Birla MIP, FT India MIP, Principal MIP, Prudential ICICI MIP, SBI Magnum MIP and Templeton MIP.

Best performer: Alliance MIP is the best performer among monthly income plans. However, even Alliance MIP has not been able to beat a combination of directly investing a smaller proportion of say about 10-15 per cent in equity funds and the rest in debt funds.

For example, had an investor invested 15 per cent in Alliance Equity and the remaining in Alliance Income Plan a year ago, it would have produced a return of about 25 per cent. In contrast, Alliance MIP generated a return of only about 20 per cent.

All the other MIPs have similarly under-performed. On an average, a direct investing strategy returned about 21.4 per cent last year. The seven MIPs have, on an average, delivered returns of about 16.7 per cent during the same period.

Importantly, MIPs have under-performed the direct investment strategy consistently over the last few years. Over a long period of, say, 10-15 years, this under-performance could reduce the wealth generated by MIPs.

Need for equities: MIPs make a valid point, which is the need for the presence of equities in a portfolio. Given the risk-averse nature of the Indian investor, exposure to equities of about 10-15 per cent is appealing. However, MIPs have been found wanting in the implementation of this strategy, as revealed by the returns generated.

MIPs also have another advantage. Since MIPs do not levy any entry load, exposure to the equity component can be had with out any such loads.

However, this is neutralised to a large extent by the fees charged each year, which is higher than that charged by income funds. In addition, the direct investing strategy outperforms even when adjusted for the entry load applicable on the equity component.

: At the end of December 2003, Alliance MIP had about 14.7 per cent of its assets in equities. For other MIPs, the proportion ranged between 8 per cent and 17 per cent. Importantly, the cash component in these MIPs was also quite high, possibly due to large inflows. Prudential ICICI MIP is the largest among the seven, with assets under management of about Rs 872 crore.

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