An average MIP is a double-edged sword and comes off worse than bank FDs. But a few are worth considering

Moneylife Digital Team

Monthly income plans (MIPs) are pitched as an interesting mutual fund offering. They are sold to investors who want a regular stream of income, every month. A typical MIP invests almost 85% of its assets under management (AUMs) in debt and keeps a small equity exposure for the upside. Investors earn a marginally better return than a portfolio that is exposed purely to debt—if the market is up. If the interest rate goes sideways to down, and equity markets go sideways to up, MIPs will more than meet their expectations.

But do MIPs really succeed in providing investors with the regular income that they seek from such schemes? What is different in these schemes compared to other fund offerings? What has been the record of the various MIPs currently available? Moneylife examined these questions and the answers we got were not very different from what we usually unearth about performance of other mutual fund schemes—the average performance of MIPs will not cheer you up. You have to choose the right MIP—if at all you are interested in the product—very carefully.

First of all, the moniker ‘MIP’ is a misnomer. Many MIPs do not provide a regular monthly income. They cannot; simply because neither debt nor equity can guarantee anything, with unchanging regularity, especially over one to three years. When interest rates rise, the value of debt falls. At such times, if the equity part performs well, the return may be protected but this is not certain. Let’s see what MIPs have actually done for investors over various time periods (five years, three years and one year). The CRISIL MIP Blended Fund Index is the benchmark used by all the schemes.



There were six MIPs, which were among the top 10 in all the three time periods—HDFC MF Monthly Income Plan-Long Term Plan, HDFC Multiple Yield Fund, HDFC Multiple Yield Fund-Plan 2005, Birla Sun Life Monthly Income and Canara Robeco Monthly Income Plan and Reliance MIP–Growth.

Consider 8% as the average bank fixed deposit (FD) rate over the past five years. Over a five-year period, there were 17 schemes (out of 36) that yielded a return of more than 8%; in the three-year period, there were 16 schemes (out of 43) which delivered a return of more than 8%. In the one-year period, only one scheme (HDFC MIP-LTP) has given a return of more than 8%.

MIPs, like other mutual fund products, should be bought only for the long term. You have to lock in your investment for at least three to five years to get a few extra percentages of return—which usually comes from a rising equity market. But some funds have been terrible performers even over the long run—Baroda Pioneer MIP Fund (3.42%, 3.26% in three years and five years, respectively); BNP Paribas (3.03% and 4.36%); ING MIP Fund-Growth (4.24% and 4.86%); JM MIP (2.82% and 3.9%); Kotak Monthly Income Plan (3.88% and 4.54%); SBI Magnum MIP (3.84% and 4.86%) and Sundaram MIP-Moderate (4.22% and 4.55%).

Even during a period when the equity market performs well and interest rates are range-bound (as has been the case in the past five years), MIPs can end up delivering much lower returns than the post-tax return from FDs. In FDs, an investor has an assurance that whatever the future interest scenario may be, he will get a certain interest rate on the FD. On the face of it, the flexibility of the MIP fund manager to buy debt and stocks that he prefers may seem like a tool to earn higher returns, but the reality has turned out to be different. The worst part is that these funds are usually bought by people who are no longer working and depend on the monthly income from their investments.

MIPs are riskier than pure debt funds because of their equity component. While they offer the opportunity to earn higher returns than those from pure debt funds, these may be lower, if the equity component performs poorly, as MIPs usually invest in blue-chip stocks only.

MIPs are better than FDs on the tax front since dividends are tax-free in the hands of investors, while interest on FDs is taxable. But, again, even after taking the tax component into account, FDs have often proved to be better than the average MIP. There are only a handful of MIPs which have understood what serious asset management is all about—and you should stick to them.