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Sunday, February 7, 2010

Monthly Income Plans - MIPs




Monthly income plans, or MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments. Only about 10-20% of the assets are allocated to equity stocks. But the very name – monthly income plan – is a bit misleading, as these funds do not guarantee a monthly income. Like any other mutual fund, the returns of this fund are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation. The fund house may opt to skip a month without a dividend depending on the market performance.

MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where the investors do not receive regular dividends, but gains in the form of capital appreciation.

Suitability

MIPs are suitable for conservative investors who want to earn marginally better returns than a debt-only portfolio. Conservative investors generally remain invested in fixed income instruments, but sometimes they need returns that are above the inflation by a few points. Obviously, equity exposure is the best way to provide this meaningful return over the inflation. A MIP typically invests bulk of its assets in debt, while a small equity exposure is maintained to earn something extra.

Example:

Let us consider a typical example where investor A invests Rs. 1,00,000/- in a Bank FD and investor B invests the same amount in a MIP.

Assumptions:

Returns on Bank Deposits: 8% per annum
Returns on Debt Instruments: 8% per annum
Returns on Equity Market Instruments: 15% per annum
Allocation Ratio of MIP: 80% Debt and 20% Equities

Returns:

Investor A:

Interest = Rs. 8,000/-

Total value of investment at the end of 1 year = 1,08,000/-

Investor B:

Interest on Debt Instruments (Rs. 80,000) : Rs. 6,400/-
Capital Appreciation on Equity Instruments (Rs. 20,000) : Rs. 3,000/-

Net Gains: Rs. 9400/-

Total value of investment at the end of 1 year = 1,09,400/-

Clearly the 20% exposure to equities is the reason for the extra appreciation of investment in MIP's which gives the investor an extra earning with the safety of debt instruments because a bulk of the investment (around 80% or more) is invested in them and hence the capital the investor invests is safe and the chances of loss of all the investment is very minimal.

Happy Investing!!!

3 comments:

  1. Hello Mr.Anand Vijay kumar.. I wos jus surfing the net today and i found ur blog ..I felt very happy to know that there is some one else like me who loves to share what ever he knows about various instruments available in markets today...N even i found out that some of our posts are quite similar!!..visit http://stocktalkforyou.blogspot.comits my blog..Hope u will keep up ur great work..looking forward to read more posts from u :)..ash

    ReplyDelete
  2. Hi anand In MIPs 80%is invested in debts.....Does the returns are guaranted..Or is it also based on stock market fluctuations....

    ReplyDelete
  3. @ Anonymous

    There is no such thing as guaranteed returns in any stock market related investment instrument. however, since MIPs invest nearly 80% of their money in debt, we can approximately predict the returns.

    A point to note is that, the losses made by the 20% equity investments can significantly corrode the profits of the debt instruments. So it is always better not to expect too much returns and be prepared for the worst

    ReplyDelete

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