As an investment class, monthly income plans have proved the past year that for investors who are risk averse there is a better way to bigger returns than pure debt funds.

Having said that, a category average annual return of 15 per cent during the period, though much better than the debt funds - most of which have managed only single digit returns - pales in comparison with that of equity diversified funds (108 per cent) and other equity fund products.

However, in defense, it must be said that the big rally witnessed in equity markets for most of 2003 and early 2004 enhanced the performance of the equity class. With the era of assured returns now over, the question is why would anyone want to invest in MIPs?

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There is an argument in MIPs' favour in these volatile times of index see-saws and debt market underperformance.

The attractiveness of monthly income allied to an equity component, which is the reason d'etre of an MIP, is being increasingly touted as the remedy for the risk-averse small investor who can benefit from equity gains while being guaranteed his monthly income.

According to Nilesh Shah, chief investment officer (fixed income) of Franklin Templeton Investments, MIPs offer investors the advantage of a conservative debt portfolio allied to a small equity portfolio.

MIPs are ideally suited for those investors who want a monthly income to take care of their expenses, though unlike a fixed deposit, neither the return nor the capital is guaranteed in MIPs.

Starting as an assured return product in India, Unit Trust of India was the only one to provide MIPs to Indian investors until 1999. With the entry of private players into the market, the MIP menu on offer has increased manifold in recent years.

Better bet than debt
Alliance Capital Mutual Fund's Alliance MIP (21.09 per cent), FT India MIP (20.16 per cent) and Templeton MIP (19.20 per cent) lead the annual returns race currently while UTI's MIPs lag at the bottom of the table. Are the returns of these MIPs compatible with investor expectations? Fund managers think so.

"MIPs have delivered good returns the past year and we hope to do better in the future," says Shah.

Amitabh Mohanty, vice-president (fixed income), Alliance Capital Asset Management (India), is of the opinion that if you are a debt investor, MIPs are a better option in times such as these.

While assets under management of Templeton's MIP scheme have soared from Rs 92.95 crore in April 2003 to Rs 407.74 crore in February 2004, others like Birla MIP (from Rs 140.91 crore to Rs 1053.88 crore) and Alliance MIP (Rs 303.31 crore to Rs 403.14 crore) have also managed to lure investors into their camp.

The interest in MIPs also prompted other leading funds like Principal MF, HSBC MF, Reliance MF and HDFC MF to launch MIP schemes.

Not for equity investors
Exactly what kind of investors are these funds aiming at? "MIPs are essentially for a debt investor who can afford a small amount of equity exposure," says Mohanty.

These schemes while offering the relative safety of debt instruments, can also boost returns through their equity component.

However, fund managers caution investors to be prudent in their investing aims. According to Mohanty, MIPs are not for a typical equity investor. "It is basically a debt product."

The reasons for investing in MIPs are manifold. If you are a die-hard debt fan, given a low interest regime, a part of your investment needs to make better returns to beat inflation.

"These funds try to maximise the coupon income, while insulating your portfolio from interest rate volatility," says Shah.

"Apart from offering a stable income even in volatile market conditions, the exposure to equity has the potential to deliver long-term capital appreciation to investors."

If MIPs with a high debt components perform much better than debt funds, where is the need to invest in debt funds? you may ask.

While MIPs' outperforming equity component has helped them beat pure debt funds last year, it stands to reason that MIP returns may take a dip as and when equity markets start on a downward curve.

Also the higher volatility caused by the equity portfolio of MIPs means that they are not ideally suited for risk-averse investors who prefer the safety of debt funds.

Take a longer view
Fund managers agree that while the short-term outlook is cloudy, prudent portfolio allocation can bring in rewards in these dynamic times over a longer-term. One also needs to diversify risk.

"The key for investors is that they should not be over-exposing themselves to one asset class. Your portfolio allocation depends on your risk appetite and financial needs," notes Shah.

It also makes eminent sense to check the dividend record and performance of the fund before investing, advise mutual fund watchers.

While MIPs with higher debt exposure are likely to serve your interests better in a dull equity market scenario, a quality equity portfolio in good times will give you an added advantage over regular debt schemes.

What kind of timeframes should an MIP investor be looking at? Investment analysts advise investors to take at least a medium-term exposure to MIPs if not long-term.

"It is always better to stay put for the longer-term, say a minimum of one year," says Mohanty. Fund managers argue that even with the current volatility in the equity markets, if you are willing to stay put for a longer-term, MIPs can provide the goods.

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