MIPs: Out of sync

Suresh Krishnamurthy

THE mutual fund industry is continuing to tread the beaten path with the launch of Monthly Income Plans.

The latest to join the bandwagon is Reliance Mutual Fund, and indications are that it will not be the last. The continuing success of the UTI's MIPs may in part explain the enthusiasm of mutual funds in continuing to launch them.

Another reason could be to attract investors who want high-return MIPs even if it means a sharp rise in their risk profile. All MIPs now invest 15 per cent of their funds in equities. MIPs floated by the UTI invest a substantially higher proportion in equities.

The risks involved in this 15 per cent spike cannot be understated. While even a 10 per cent decline in the value of equities could reduce the returns sharply, some of the stocks in the MIPs of a few MFs have declined as much as 50 per cent. Without a recovery in stock prices, these MIPs may end up paying less than a savings bank account would. In short, the reality remains the same for an investor.

With the incidence of the 20 per cent tax on dividends distributed, MIPs are the least attractive investment opportunities for investors. Alliance MIPs, which used to declare 10 paise per month per unit as dividends, have now reduced it to 9 paise per unit per month. The decline in the dividends declared is mainly due to the incidence of the dividend distribution tax.

There are several other equally attractive investment opportunities for investors which offer better monthly incomes. Instant liquidity is perhaps the only crucial advantage enjoyed by open-end MIPs. However, by investing in the growth options of other mutual fund debt schemes and using the systematic withdrawal route investors can have the monthly income and instant liquidity advantage of MIPs.