A similar story unfolded in an asset class called Monthly Income Plans (MIPs). When markets corrected from a high of 20827 SENSEX levels reached sometime on January 07’2008 to a low of 8325 reached on March 2’2009; then bounced back from these levels back to around 21,004 levels on November 01’2010, this asset class performed extremely well during this bounce back period. Based purely on returns figure in that year, most advisors started recommending this asset class sometime in November-December 2010 after seeing handsome returns in this asset class. This is evident from the industry corpus growth in MIPs.

Also, as one can logically conclude, MIP as an asset class would have taken a beating during the equity meltdown phase from January 2008 to March 2009; would have performed very well from March 2009 to November 2010 & the once again corrected from then to now.

However, I have been recommending investment in equities thru strategy of Systematic Transfer Plan from Liquid to Equity. If one would have done this even from the peak of January 2008 & continued the same thru the volatile period of March 2009, then once again peaking in November 2010 & once again thru the downturn, returns in the said strategy v/s one time investment in either equity or MIP from January 2008 till May 31’2011 would have looked as follows:

Hence, as can be seen from above, certain asset classes become flavour of the season or a year or so & go out of flavour without giving adequate warning to the investors. As against that, strategies like SIPs or STPs can be an ongoing strategy which can act as flavours for all seasons & can bring a) discipline in investing b) create an average during volatile times of the market & c) try & achieve decent returns for all times to come without investor trying to outguess the markets.

With current equity market conditions, I strongly recommend investors to try and invest thru this strategy of STP instead of trying to time the markets. Additional return in this strategy is also partly attributable to the fact that your principal amount gets invested in Liquid Schemes (currently generating 8-9% p.a.) & slowly & steadily gets replaced with equity assets over a period of time

Other alternative is parking their funds in Fixed Deposits with some assured returns but a very tax in efficient vehicle (as the investor will have to pay full tax on interest). Also, in FDs, funds get stuck for a period of time like 1/2/3/5 years & hence, the investor loses on liquidity as well. Also, the principal amount at the end of the FD tenor does not appreciate & the investor gets back the same amount which he/she would have invested at the beginning of the period. Also, many times these returns do not even beat the inflation.

In such a scenario, the investor who wishes to earn a regular income is at a tremendous loss in terms of options available to him to earn regular income to meet his day to day expenses. However, one strategy that can help an investor overcome all the above viz:

Is SYSTEMATIC WITHDRWAL PLAN from well managed MONTHLY INCOME PLANs. This tool, besides being an extremely tax efficient way of having regular cash flow for the investor also has a capability of enhancing the overall portfolio value (if managed well & withdrawals of the investor on an ongoing basis is less than the overall returns of the scheme i.e. if the scheme has performed say 12% p.a. in one year & the investor has only done SWP of say 8.50% p.a.; then the investor besides withdrawing regular sums through SWP is also enhancing their overall portfolio value).

Following analysis of two of the best managed MIPs viz. Reliance Monthly Income Plan & ICICI Prudential Monthly Income Plan will show case how SWPs score over traditional FDs in terms of returns & tax efficiencies over a period of time. The way the following table are designed are based on an original investment value of Rs.10 lacs at their respective NAVs & SWP @8.50% p.a. i.e. Rs.7100/- p.m.  :

being an exception as equity markets had collapsed in that year)  from the start & the investor has paid very little tax compared to tax implications on FD interest

ANALYSIS OF RELIANCE MIP SINCE  JAN 2001:

As can be seen from above on Y on Y i.e. from Jan 2001 to Jan 2002 value of your MIP after Rs.85,200/- as SWP is worth Rs.11,42,011 with tax implication of only Rs.1,526 v/s tax implication of Rs. 25,560/-  in FDs . On cumulative basis since Jan 2001 till Jan 2010, an investors has don an SWP of Rs.7,66,800/- having total tax implication of Rs.41,161/- (including Short Term & Long Term & again assuming that the investor is redeeming from MIP at CV of Rs.11,42,011/-) v/s same interest of Rs.7,66,800/- on FD  having an a tax implication of Rs.2,30,040/-.

ANALYSIS OF RELIANCE MIP SINCE JAN 2008: YEAR WHEN EQUITY MARKETS CRASHED:

As can be seen from above on Y on Y i.e. from Jan 2008 to Jan 2009 value of your MIP after Rs.85200/- as SWP is lower at Rs.8,96,969/- with no tax implication (due to loss). However, on cumulative basis from Jan 2008 to Jan 2010, value of your MIP has grown to Rs.9,16,047/- with no tax implication (due to losses). Total value of your investment in MIP plus withdrawal is Rs.10,86,447/- v/s total value of FDs plus interest less tax is marginally higher at Rs.11,19,280/-

ANALYSIS OF ICICI PRU MIP SINCE  JAN 2004:

As can be seen from above on Y on Y i.e. from Jan 2004 to Jan 2005 value of your MIP after Rs.85,200/- as SWP is worth Rs.9,56,706/-  with tax implication of only Rs.450/- v/s tax implication of Rs. 25,560 in FDs . On cumulative basis since Jan 2004 till Jan 2010, an investors has done an SWP of Rs.5,11,200/- having total tax implication of Rs.33,762/- (including Short Term & Long Term & again assuming that the investor is redeeming from MIP at CV of Rs.12,15,317/-) v/s same interest of Rs.5,11,200/- on FD  having a tax implication of Rs.1,53,360/-.

ANALYSIS OF ICICI PRU MIP SINCE JAN 2008: YEAR WHEN EQUITY MARKETS CRASHED:

As can be seen from above on Y on Y i.e. from Jan 2008 to Jan 2009 value of your MIP after Rs.85200/- as SWP is  at Rs.10,01,096/- with no tax implication v/s similar interest on FD of Rs.85,200/- having a tax implication of Rs.25,560/-. However, on cumulative basis from Jan 2008 to Jan 2010, value of your MIP has grown to Rs.11,15,173/- with  tax implication of Rs.12,108/- after SWP of Rs.1,70,400/- v/s same interest of Rs.1,70,400/- on FD having tax implication of Rs.51,120/-

CONCLUSION:

How is the Debt Portfolio Managed:

Debt component is managed passively ( like an FMP) wherein the Fund Mangers endeavour is to invest in high accrual, non MTM low average maturity papers & avoid trading in these papers. Current carry is between 5.25% to 5.50% on the debt side with following maturity profile:

How is Equity Portfolio Managed:

15-18% of the equity portfolio is invested with an intention to buy & hold. They have created a defensive portfolio of deleveraged equities with healthy cash reserves. Though these shares can also correct as & when markets correct, the same would be less impacted than the leveraged company shares. Though the scheme is allowed to invest upto 25% in equity, their endeavour would be to restrict the same below 20% at any given point in time. Even if the markets correct by 25% over 1 year from current levels, accrual of 5.5% to 5.75% on 80% of the portfolio would be sufficient to neutralise any adverse impact of 25% going negative on 20% of the portfolio.

The said scheme has performed exceedingly well over different time horizons:

Following is the portfolio break up of their equity holdings as on November 30’2009:

I would recommend investment in the said scheme with at least one year view as there is exit load of 1% if one exits within one year from the date of their investment.

One fund House which has had a dedicated focus on an MIP variant with all the above features intact is DWS & the scheme name is: DWS Money Plus Advantage (90:10 product). Since the inception of the scheme on November 2’2007, it has a consistent track record of monthly dividend payouts & the scheme is managed exactly on the lines mentioned in that note.

Debt is managed as high accrual lower average maturity & equity is managed with some strategies as mentioned below with absolute gain theory to create alpha.

Equity component is being managed thru following strategies:

1. Buy Back
2. Open Offer on Delisting
3. IPOs

One word of caution which I had not mentioned in that note & which needs to be highlighted here is that since some of the strategies involve equity variants like Buy back & open offer on de listing, the equities which would have been bought with these strategies in mind are capable of either going up or down from the purchase price of these equities till such time the actual buy back & Open offer strategies pan out at some later date. Hence, though technically it can give negative returns on monthly or quarterly basis (based on SENSEX going up or down) on six monthly or on yearly basis (by which span of time these strategies pan out) it should not give negative returns. The same can be seen from the following 3/6/12 month rolling returns observations:

With some cushion maintained in their Monthly Dividend NAVs, the said scheme has not skipped a single dividend even in those months where they might have gone negative.

Dividend Track Record (in % p.m. & Total % p.a.):

Hence, a word of advice & caution is that kindly do not judge the scheme based on 3-6 month performance. Each strategy in equity needs min of 6 months or higher to pan out & hence in the intervening period (just like Arbitrage Schemes) the NAVs are likely to be volatile.

I would strongly advise you to look to invest in the said scheme with one year plus view. This can

a) Generate regular returns

b) Outperform other debt market schemes on an ongoing basis.