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MIPs: Are the expenses justified?
October 15, 2004 15:47 IST
The expenses incurred by mutual funds under various heads including investment management, advisory fee and marketing expenses have an impact on the investors' returns. This impact gets magnified in cases of investment avenues like monthly income plans (MIPs) where returns are on a relatively lower side. In this article, we analyse the performance of top performing MIPs over a 1-Yr period and find out how they rank on the "expenses" parameter. MIPs: Top performers over a year| Monthly Income Plans | NAV (Rs) | 1-Mth | 1-Yr | Assets (Rs m) | Exp. Ratio | Ratio Date | | FT INDIA MIP | 16.31 | 0.90% | 8.78% | 13,216 | 1.68% | 31/08/04 | | DSP-ML SAVING PLUS (M) | 12.05 | 1.07% | 7.94% | 4,790 | 2.50% | 31/08/04 | | TEMPLETON MIP | 16.07 | 0.60% | 6.39% | 3,771 | 1.95% | 31/08/04 | | ALLIANCE MIP | 20.07 | 0.46% | 5.69% | 3,474 | 2.03% | 31/08/04 | | CHOLA MIP | 11.15 | 0.95% | 5.49% | 214 | 1.75% | 31/08/04 | | BIRLA MIP PLAN C | 15.64 | 0.58% | 5.40% | 8,806 | 1.99% | 31/03/04 | | MAGNUM MIP | 13.69 | 0.68% | 5.30% | 1,226 | 1.76% | 31/08/04 | | TATA MIP | 12.46 | 0.59% | 5.15% | NA | 1.69% | 31/03/03 | | PRU ICICI MIP | 14.82 | 0.81% | 5.05% | 10,881 | 1.50% | 31/08/04 | | PRINCIPAL MIP | 12.85 | 0.63% | 4.73% | 3,416 | 1.95% | 31/08/04 |
(Source: Credence Analytics. NAV data as on October 11, 2004.)The best performing MIP over a 1-Yr period i.e. FT India MIP (8.78%) was a cost-efficient performer as well with an expense ratio of 1.68%. In terms of cost-efficiency the fund was second only to PruICICI MIP -- expense ratio 1.50%. Others like DSP ML Savings Plus (7.94%) delivered impressive returns but at a prohibitively high cost -- expense ratio 2.50%. On the other end of the spectrum are funds like Principal MIP (4.73%) who have delivered modest returns but their expense ratios (1.95%) rank on the higher end. To be fair to the lagging MIPs, the expense ratios are also a factor of the fund's corpus size; economies of scale can come into play and thereby lowering the expenses incurred. However there can barely be any justification for high expenses when it coincides with poor performance. It would be interesting to study how other hybrid options like balanced funds perform on this front. Critics might argue (and we agree) that comparing balanced funds and MIPs is akin to comparing apples and oranges. However there are some intrinsic similarities in terms of their portfolio holdings i.e. they both hold a debt and an equity component albeit in varying proportions. A top-performing balanced fund can be a good indicator to determine how well or otherwise its counterparts in the MIPs segment have performed in terms of expenses.
Get expense ratios for mutual fund schemes across categories. HDFC Prudence, a leading balanced fund (NAV appreciation 25.96% over 1-Yr, 43.32% CAGR over a 3-Yr period) fits the bill for this task. The fund had an expense ratio of 2.27% as on March 31, 2004 and the same can be attributed to the higher equity component. Broadly speaking, an MIP which invests just 20-25% of its corpus in equities should not exceed a balanced fund's (which invests 60-70% of its corpus in equities) expense ratio. Barring a few, most MIPs featured in the top performers list, score reasonably well on the expense ratio test. We are not suggesting that investors should evaluate MIPs solely on the expense ratios. But investors must realise the costs associated with their MIP investments and should give due importance to them while evaluate the feasibility of their MIP investments.
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