MIPs are having the time of their life! As many as 29 out of the 39 Monthly Income Plans (MIPs) have posted their best one-month returns since June this year, with majority of them doing so during the period from September 14 to October 16. During this period, the returns of these funds have averaged at over 4%, which is quite impressive for such a category.
The category is already into double digit returns this year, thanks to the rally in the equity markets. Since the start of the year till November 2, 2007, the category average returns stood at 10.37%. This is better than the returns delivered by the category in each of the last three calendar years- 2004 (5.69%), 2005 (9.32%), and 2006 (9.51%).
So is it the time for the beleaguered and almost forgotten category of MIPs to come back into reckoning? Well, that seems to be a far cry. Despite putting up a decent performance, the MIP category has still not recovered from the swift flight of assets it witnessed in 2004, when the debt markets hit a rough patch. There have been no new fund launches in a long time. And at Rs 5,192 crore, the assets under management of the category are close to its lowest in the past five years.
Nevertheless, we thought this is the opportune time to take a break from going ga-ga over equity and pay attention to other fund categories. Their returns are not as lucrative but they surely add value to the portfolios of a certain class of investors.
The monthly income factor
While MIPs are not obliged to declare monthly dividends, their track record suggests a high degree of consistency on this front. Most of them do have a history of declaring dividends each month regularly under their monthly dividend options.
In the past 35 months, as many as 28 funds have declared dividends in 30 or more months. This clearly shows that missing dividends in any particular month is more of an exception than the norm.
And importantly, these funds also strive to maintain the date of declaration as well as the quantum of dividend at a constant level each month. This is of great value to those who depend upon this income stream to meet their monthly expenses. Some of the funds that stand out in this regard include HDFC MIP Short-term (with a monthly dividend at 0.60% month after month), HDFC MIP Long-term (0.70%) and JM MIP (0.54%). While the two HDFC funds declare dividends around last week of the month, the JM fund prefers to do so in the first week itself.
So the MIPs do live up to their names- monthly income plans- after all!
Rising aggression
Ever since the debt markets hit a rough patch, hybrid funds have turned to equities to generate returns, while playing very safe with their debt investments. Even today, most of the MIPs have either exhausted their maximum permitted equity allocations to the fullest or are very close to it.
But of late, some of them are taking a more aggressive stance even in their debt portfolios. After a gap of over three years, the median maturity of the category as a whole has gone up to over two years. The most prominent among these is Sundaram BNP Paribas MIP, whose average maturity period has zoomed from just over one year at the end of June 2007 to over 10 years now. Another case in point is ICICI Prudential MIP, which has also invested in long-dated papers to take its average maturity period to over seven years.
Moreover, there is also a noticeable increase in the gilt investments of some funds, the category exposure to which has trebled from under 6% six months ago to 18% now. The list of major gilt investors include DBS Chola MIP (74%), ABN Amro MIP (55%) and ICICI Prudential MIP (42%).
These portfolio shifts point towards higher interest rate sensitivity. Perhaps the fund managers expect interest rates to stabilise now. The category?s exposure to AA and below rated papers have also gone up from under 10% at the start of the year to over 34% now, as the fund managers are trying to extract that extra bit of yields.
All this suggests that after lying low with their debt investments for quite a while, fund managers are making bolder portfolio moves. Only time will tell how beneficial these moves have proven to be.
Choosing the right MIP
While choosing an MIP for your portfolio, don?t just look at the performance, but do check the asset allocation patterns, which can make a significant difference to an MIP?s risk profile. For example, the maximum stated equity allocation of MIPs varies in a wide range of 10% to as much as 30%. The ones with higher equity allocation may have delivered far higher returns, but they are bound to be much more risky. Therefore, it is up to you as an investor to choose the suitable one rather than getting swayed by returns.
The author is CEO, Valu Research