Reliance Monthly Income Plan: Invest

Investors with at least a two-year horizon can buy units of Reliance Monthly Income Plan (Reliance MIP). Reliance MIP is a debt-oriented fund that can invest up to 20 per cent of its portfolio in equities.

The fund generated an annualised 11.4 per cent return over a five-year period as against category average return of 7.4 per cent. Inspite of subdued performance during the calendar year 2011, a smart recovery both in its debt and equity exposure helped pep returns in recent months.

The decline in inflation and cut in rates would mean gains (from a bond rally) on the medium to long-term bonds held by funds such as Reliance MIP.

That said, it now appears that rate cuts in the ensuing months may be lower than expected. Even then, the prospect of holding a debt portfolio with high yields (for long-dated securities) may still be an attractive proposition for investors. Reliance MIP's current portfolio, if held to maturity, will have a yield of 9.1 per cent.

Investor strategy

Equity markets have been showing signs of revival in recent months, after a volatile 2011. This augurs well for debt-oriented balanced funds, as their equity exposure provides returns higher than traditional debt investments while high debt portfolio protects the downside.

This combination will help investors to earn inflation-beating returns, even when interest rates on debt products become unattractive.

That said, during periods of equity underperformance, funds such as Reliance MIP have been hit. Hence the fund's risk profile is higher than typical debt funds. To mitigate the equity risks arising in the short term, investors should consider holding the fund for a time frame of not less than two years.

Performance

Over a three-year period, Reliance MIP generated 13.8 per cent annualised return. The returns were three percentage points higher than the category average.

On a one-year rolling return basis, the fund outperformed its benchmark more than three-fourths of the time in the last four years.

The fund's holding period rose from 2.2 years in January 2011 to 5 years in September 2011. The shift into securities with longer maturity ahead of others may have led to the fund under-performing last year.

Equities too pulled down its performance in 2011 what with exposure to mid-cap stocks. This was the case in 2008 as well.

But the risk-adjusted return (measured by sharpe ratio) of Reliance MIP, over a five-year period, is among the highest in the debt-oriented balanced fund category space. That means that the fund has compensated investors with returns, despite the risks that arise, especially from equities.

Portfolio

As of February 2012, equity exposure constituted for 17 per cent of the portfolio while debt instruments accounted for 76 per cent. Currently, the fund is not invested in any money-market instruments.

The average assets under management of Reliance MIP was Rs 5,182 crore for the quarter year ended December 2011.

Such a large corpus augurs well for a debt fund as it can actively scout for mispriced bonds. The fund currently holds 6 per cent of its portfolio in cash which allows it to invest in over-night markets where the rates are attractive due to prevailing liquidity crunch.

Small scale redemptions do not also affect fund performance.

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