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I invested in Monthly Income Plans of mutual funds in January 2004. The present NAV is less than the purchase price. Please advice me whether to wait for another six months or to redeem immediately. -- S. V. R. Rao, Vishakapatnam

The sharp reversal in the equity market since January, combined with the dwindling returns on debt portfolios has hit quite a few Monthly Income Plans (MIPs) over the past few months. We hold the view that MIPs are not a suitable investment option for investors, especially those looking for regular income. The equity portion in an MIP could add to returns from the debt portion over the long term. But the equity portion does undermine the stability of returns from an MIP, given that returns from equity market tend to be compressed in short periods.

At present, the outlook for the debt portion of your MIP is also quite uncertain. Over the past few months, debt mutual funds have turned in negative returns, as the value of the bonds in their portfolio have drifted down on fears about rising interest rates.

With interest rates clearly showing an upward bias, debt funds should benefit from higher yields on their new investments. With a substantial portion of the portfolio already invested in bonds, and several funds also having a large asset base, the effect of higher rates would, however, take time to show up. Until then, their annual returns could hover in the 4.5-5 per cent range.

Given the fluid interest rate scenario, a safer course of action now would be to redeem your MIP units and switch the proceeds to small savings schemes, where you can lock into higher interest rates. If you would like your portfolio to have an equity tilt, you can achieve this by parking a small portion of your portfolio — say, 5 or 10 per cent — in diversified equity funds such as Franklin India Bluechip, HDFC Top 200 or HSBC Equity Fund.

(Queries may be e-mailed to , mf@thehindu.co.in or sent by post to Business Line, 859/860 Anna Salai, Chennai 600002.)

Aarati Krishnan

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