While the marginal equity component in MIPs give them a clear edge over pure debt funds in terms of returns, it also adds an element of risk. In case the stock markets slip into the grip of bears, these funds could throw up an unpleasant surprise. However, this market risk is substantially reduced with a long-term investment perspective.

For instance, let us compare the three year average returns of 25.27 per cent from the Value Research category of diversified equity funds and the average return of 11.94 per cent from the medium-term bond funds. Assuming the benchmark exposure of 85:15 in equity and debt, an MIP would have delivered a return of 13.93 per cent, a full 200 basis points more than a bond fund.

Currently, there are seven open-end MIPs available in the market. All of these, except Alliance MIP, were launched last year. While none of these funds gurantee returns, fund managers are always under pressure to deliver monthly dividends, considering that the products from UTI and LIC AMC assure returns. However, with both equity and debt markets hitting a turbulent patch last year, it was a herculean task for MIPs to deliver returns. In fact, a few MIPs had to skip monthly dividends while some others were forced to slash payouts.

For instance, MIP gained 28.7 per cent between August 1999 and February 2000 (average returns of 3.5 per cent per month) and doled out handsome monthly dividends. However, with the trend on stock markets reversing, the return was a negative 0.9 per cent for the next seven months ended September 2000. In sync, the monthly payout also declined from around 1 per cent or 10 paise to as low as 3 paise in October 2000. Surely, even a 10-15 per cent allocation to equity is enough to turn your MIP into a volatile investment and wipe out the returns from the debt component.

Battered by the volatility in equity markets, most MIPs are now consciously staying away from equities. This may make your MIP look like another bond fund, the move is surely in line with their primary objective of delivering steady returns. Nevertheless, dividend plans still have the option of taking equity exposure once an adequate buffer is build to survive volatility.

Alliance offers one of the high yielding MIPs. The funds' monthly option, launched in July '99 has paid a total dividend of 26.3 per cent in just over 18 months. Its growth plan has also yielded annualised returns of 19.26 per cent, since launch, with marginal exposure to equity which is concentrated on the ICE sector.

With equity markets yet to stabilise, the fund has pared its exposure to equity to three per cent of the corpus in January 2001. The fund is an interesting bet if one is looking at higher returns. However, given its aggressive portfolio of technology companies, investors should hold a long-term view.

Launched in February 2000, Templeton MIP prudently avoided investments in equities in its monthly options and parked all its investments in debt instruments. The fund had a predominant allocation to AAA papers, built to generate regular returns. However, since October 2000, the fund has had an equity exposure between 7-10 per cent in its growth and half-yearly dividend options. The fund has paid an average monthly dividend of 0.66 per cent. Its growth option has also delivered a comfortable 9.4 per cent returns. Sun F&C MIP started off with an equity allocation of 8 per cent in the volatile ICE sector. While the fund paid a dividend of 0.9 per cent in July 2000, the NAV subsequently slipped below par and forced the fund to skip 5 monthly dividends. However, with a re-orientation in investment strategy, the fund is now fully invested in debt. The realignment has helped the fund pay dividends for December and January 2001. Since launch, the fund has given a return of 4.4 per cent.

Investors, who want a limited exposure to equity would do well by investing in the new generation MIPs, since at no point of time would investments exceed the ceiling. On the other hand, if investors opt for their own portfolio with 85-90 per cent investments in debt funds and the rest in equity, it would call for periodic rebalancing, which is an arduous task. Further, MIPs have the flexibility of varying their allocation in order to take advantage of favourable trends in equity and debt markets.

Value Research