Some misconceptions related to MIP offered by mutual funds

Arnav PandyaThere are ‘Monthly Income Plans’ (MIP) that are offered by mutual funds and these seek to give a regular flow of income to the individual along with an element of risk. Investors look at the name of the fund being a monthly income plan and then they assume a lot of things about the fund which might not all be correct. This is the reason one has to be careful in looking at issues related to this type of scheme and put things in the proper perspective. Here are some of the beliefs of individuals that might need to be revised due to the nature of these funds. Regular incomeThe term monthly income suggests that the investment will pay out a sum each month and hence it will ensure a regular flow of income. This is true when one invests in the Post Office Monthly Income Scheme (POMIS) which is a debt investment and at the same time this guarantees the amount that will come to the individual over the life of the investment. The POMIS is an area where one knows exactly the amount that will be received when a specific figure is invested in the instrument. The same does not hold true for a monthly income plan from a mutual fund. Even though the name suggests a regular flow of income and that there is an option of a regular payout from the fund this need not always happen. The fund tries to ensure that there is a regular payout but if the conditions are such that this is not possible then the payout might even stop. This means that there is no guarantee about the payout and at the same time there have been several times in the past wherein the monthly income plans have actually stopped their regular payouts due to difficult market conditions.Equity exposureThe term monthly income also makes an individual assume that there is complete safety in the investment and that there is no equity component present here at all. Again this is not the appropriate thing that the individual will experience when they invest in the mutual fund monthly income plan. This is because there is a small element of equity exposure that is present in these schemes which ensures that there is a risk element that arises for the individual. This is one of the main reasons why the fund could stop a payout because tough conditions in the equity markets could actually impact the whole fund in a significant manner even though the exposure here is very less. Similarity of MIPAnother belief that also needs correction is that every monthly income plan that is offered by the different mutual funds is similar and hence they can be compared to look at which to choose for investment. Once again a look at their portfolio is more important because not every fund has an equal exposure to equities as some go as high as 20 per cent while others are less than 10 per cent. This gives rise to difference in performance as the portfolios of the two funds with such different exposure will not be the same and hence their risk element is also different. Debt riskThe normal debt investments that are held till maturity have little risk and hence the investor is sure that the POMIS will pay out the required rate of return on the due date. The mutual fund monthly plan though investing in debt will face the risk that the value of the holdings is reduced due to a rise in the interest rates in the economy. This will impact the net asset value negatively and hence turns out to be another risk for the fund that is different from a traditional debt investment.