Monthly income plans (MIPs) are seen as attractive debt-oriented options by most conservative investors for the purpose of generating a stable cash flow. These funds generally tend to beat inflation without taking major risks. While quality MIPs have delivered robust performances, there are several funds in the category that have done quite poorly compared to peers and benchmarks. The fact that as many as 17-25 (of the 38 schemes) or 40-60 per cent of the MIPs underperformed over time frames ranging from one to five years indicates substantial variation in performance.
Only 7-8 schemes have consistently beaten the CRISIL Hybrid 85+15 − Conservative Index, across one, three and five-year periods. Therefore, choosing the right schemes with suitable debt-equity allocation becomes crucial for investors looking to generate periodic income from such funds. Once quality MIPs are chosen, sticking to them for 3-5 years would be an ideal strategy to generate robust returns.
Taking active calls on the average maturity period of their debt portfolios and churning the equity portion has enabled the best funds to differentiate themselves from the underperformers.
Aggressive MIPs tend to invest in equity to the extent of 30 per cent of their portfolios.
Aditya Birla SL MIP II - Wealth 25, BOI AXA Regular Return Fund and ICICI Pru MIP 25 have been among the best across market cycles, with 20-30 per cent equity investments. With returns of 10-13 per cent, these funds have delivered 2-3 percentage points more than their benchmark.
In general, most MIPs tend to have fairly diffused holdings in equity, with individual stocks not accounting for any more than 1-2 per cent of the portfolio.
The top schemes in the category have been fairly active in churning the debt portion of their holdings.
From holding bonds, NCDs and debt securities with average maturity of 7-9 years, the top 7-8 schemes have reduced the holding profile to 1-3 years over the past few months. Given that the interest cycle is widely considered to have bottomed out and is expected to rise up again, the best schemes have been alert to the trend of firming rates.
They have also not been averse to go down the rating curve by taking exposure to AA and A rated securities (up to 25 per cent in some cases) in addition to standard AAA, A+ bonds, CPs, CDs etc., and sovereign instruments.
Different strokes
Two funds need special mention here. Aditya Birla SL MIP II - Savings 5 and SBI Regular Savings Fund have delivered benchmark-beating returns despite having minimal or no equity exposure, indicating robust active calls on their debt portfolios.
At the other end of the spectrum, MIPs such as Principal Debt Savings, IDBI MIPand Invesco India MIP Plus have delivered 1.5-4 percentage points less than the CRISIL Hybrid 85+15 − Conservative Index. Many of these MIPs have underperformed despite having substantial equity exposure and highly-rated debt investments.
By taking exposure to quality MIPs, conservative investors can beat inflation and also optimise tax outflows on long-term capital gains.
The gains on the sale of these debt-oriented funds are taxed at 20 per cent, but there is the benefit of indexation. Long term in this case would be three years. Dividends are received after a hefty distribution tax of 29.12 per cent.