Source: Money Control
There
are Monthly Income Plans (MIP) that are offered by mutual funds but often just
recognising a fund by name might not do proper justice to its features. This
can happen because when one goes into detail about the MIP portfolio then there
is going to be a huge difference that is witnessed. The significance of this
entire position is that it can change the manner in which a fund operates and
the kind of returns and risk that it poses for its investors. This variation
can turn out to be a shock for many investors and hence here is a look at how
the nature of the MIP is more important than anything else.
Nature of fund
A MIP is a scheme where the vast majority of the portfolio of the fund is in debt oriented instruments with a small amount of equity holdings. The reason the fund is called a monthly income plan is because it seeks to provide a regular cash flow for its investors. This is the important part as there is no guarantee about the flow from the fund but it will try to provide this kind of flow and this to a large part depends upon the portfolio of the fund. With an increase in the choice for investors there is a big difference in the nature of the MIP funds that are present in the market and there is a need to segregate them into different categories.
Conservative MIP
There will be some MIP schemes that have a very low amount of equity exposure. This would fall even below the 10 per cent mark and stay at around 7-8 per cent. Here the equity part is very small and the impact that this can have on the overall performance of the fund is slightly lower. The nature of the equity holdings will also determine the way it influences the net asset value of the fund. There can be some funds where the figure for a short period can dip below but this would not make them come into the conservative category but if the average consistently remains in this range then it would mean a lower risk for the investor.
Average or normal MIP
The normal MIP would have an average equity holding in the range of 12-14 per cent and this would remain in this range over an extended period of time. The ability of the equity portfolio to influence the net asset value remains high as the debt movements can easily be cancelled out and dominated over by the equity part. This is the way in which traditionally the MIP was constructed and today too, a lot of the funds would be found to be in this category with this kind of exposure.
High risk MIP
There are also funds where the average equity exposure in the portfolio remains above the 20 per cent mark. These are a category of funds by themselves because they bring to the table a different kind of risk. The going can be good when times are fine in the equity market but a sharp plunge there can reverse the situation to such an extent that it could be a long time period for which the fund is unable to generate a regular payout for the investors. Anyone who is even thinking of a regular and steady return from their MIP should stay away from such funds as they are at one extreme of the risk scale. It would be better to be able to know the kind of risk that is being taken when the investment is made in a particular type of MIP.
Nature of fund
A MIP is a scheme where the vast majority of the portfolio of the fund is in debt oriented instruments with a small amount of equity holdings. The reason the fund is called a monthly income plan is because it seeks to provide a regular cash flow for its investors. This is the important part as there is no guarantee about the flow from the fund but it will try to provide this kind of flow and this to a large part depends upon the portfolio of the fund. With an increase in the choice for investors there is a big difference in the nature of the MIP funds that are present in the market and there is a need to segregate them into different categories.
Conservative MIP
There will be some MIP schemes that have a very low amount of equity exposure. This would fall even below the 10 per cent mark and stay at around 7-8 per cent. Here the equity part is very small and the impact that this can have on the overall performance of the fund is slightly lower. The nature of the equity holdings will also determine the way it influences the net asset value of the fund. There can be some funds where the figure for a short period can dip below but this would not make them come into the conservative category but if the average consistently remains in this range then it would mean a lower risk for the investor.
Average or normal MIP
The normal MIP would have an average equity holding in the range of 12-14 per cent and this would remain in this range over an extended period of time. The ability of the equity portfolio to influence the net asset value remains high as the debt movements can easily be cancelled out and dominated over by the equity part. This is the way in which traditionally the MIP was constructed and today too, a lot of the funds would be found to be in this category with this kind of exposure.
High risk MIP
There are also funds where the average equity exposure in the portfolio remains above the 20 per cent mark. These are a category of funds by themselves because they bring to the table a different kind of risk. The going can be good when times are fine in the equity market but a sharp plunge there can reverse the situation to such an extent that it could be a long time period for which the fund is unable to generate a regular payout for the investors. Anyone who is even thinking of a regular and steady return from their MIP should stay away from such funds as they are at one extreme of the risk scale. It would be better to be able to know the kind of risk that is being taken when the investment is made in a particular type of MIP.
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