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.

This was the most mis-sold concept; especially to corporate clients who have to show their MTM losses on Q on Q basis. Most of the MIPs have 15-25% in equities & the same can go negative on month on month or on quarter on quarter basis; giving rise to negative returns for some time. The same was proven correct at the time of huge market correction in May-June 2004 when election results were announced & congress came back to power. Most of the MIPs posted huge negative returns in that quarter ending June; thereby forcing corporates who had invested in MIPs to cut their losses.

In between, since the said asset class had lost flavor with the investors, the schemes were given step motherly treatment & most of the fund houses had lost focus on the same. However, with reviving equity markets & volatile debt markets focus has once again seems to have shifted back to this asset class.

Also, MIP by its sheer name connotes that there should be continuity in dividend payouts on Month on Month basis & is ideally suited for investors like senior citizens, HNIs & SMEs. Since the corporate funds got involved, this category of schemes started getting a different treatment from fund houses. However, as most of the Fund Managers started running the debt portion as long term Income schemes & started taking more equity exposures ( there are 75:25 & 70:30 variants as well ) , the said schemes started posting negative returns from time to time; thereby forcing the fund houses to skip monthly dividends in the years when debt market yields inched up or equities performed badly ( specific years like 2004 & 2008 when equity & debt markets went haywire, lot of schemes skipped monthly dividend payouts).

However, in the past I had done some analysis which proved that MIPs have never posted negative returns on one year rolling return basis. Hence, if one stayed invested for a period of one year from their date of investments; chances are that they would not have posted negative returns for that period.

I would recommend you to look at those schemes; where the Fund House has now shifted their focus back & likely to run the scheme more conservatively with a focus to generate regular monthly income.

Kotak Income Plus (80:20 MIP scheme) is reinventing their scheme by focusing on their scheme. They have already started running the scheme based on following parameters; which is reflecting in their performance as well:

1. Lower on duration ( not more than 1-1.5 yrs in average maturity); thereby reducing interest rate risk
2. High on accrual by investing in highest quality NBFCs, PTCs, State loans etc. This will ensure high probability of monthly payouts
3. Equity component to be used for absolute gains & through strategies of writing options & IPO plays
4. Above strategy based on current market conditions should earn approx. 5-5.50% p.a. from debt component & approx. 3% from equity exposure of 15-20% giving an overall yield of 8-8.50% p.a.

Kotak Income Plus is reinventing their scheme & likely to follow the above strategy to a) safeguard investors from undue volatility, b) ensure monthly dividend payouts & c) give better returns than debt markets ( Liquid Plus schemes are generating only 4.50% to 5.00% p.a. & Income schemes currently are in negative territory)

Following is the analysis of monthly dividends declared by various AMCs since their inception. It will also show the frequency of declaration of dividend i.e. if they have declared dividend in a Financial Year in say 7 months out of 12; it will show frequency as 7/12. What this means is that the said fund house has not declared dividends in the balance 5 months.

Aug 09 as of 27^th Aug 09

From this analysis, both ICICI Prudential & Birla Sunlife MIP II-Savings 5 plan have a consistent track record of declaring monthly dividends in all years since their inception. Though Kotak Income Plus does not have a great track record of dividend payouts, with their new strategy as mentioned above, one should expect a consistent performance going forward.

I would recommend you to look to invest in the said schemes with one year investment horizon

These are some of the querries that are being raised on daily basis. Debt markets have given very poor returns for those who invested in or around October’2003 when 10 year had touched a low of 4.94%. Today the benchmark 10 year has gradually risen to 5.13%-5.15%. Are expecting any further easing of rates or firming up of rates ?

Let us analyse two or three basic inputs which determine the interest rate scenario & its impact thereon:

Yes, market is still flushed with liquidity. However, we are foreseeing that slowly & steadily liquidity will be sucked out of the system due to following reasons:

All the above factors point towards tightening of liquidity & a cirresponding rise in the interest rate scenario. We expect the markets to be range bound from now to say Mid February & thereafter to start hardening. In any case we do not forsee the interest rates to breach the 5% mark that it had touched in Mid October’2003.

IF THIS BE THE CASE, WHAT SHOULD ONE DO ?

ARE WE STILL BULLISH ON THE EQUITY MARKETS & CORRESPONDINGLY IN MIP SCHEMES ?

Though markets have run up substantially from a low of 2900 in March ’03 to its current levels of 6000 in a very short span, India still looks to be an attractive story for the following reasons. Though the bull run was very steep & sudden , the market at the present moment is taking a breather & has corrected by at least 300 points in the past few days. This is healthy for the equity markets.

All the above factors point towards a very buoyant equity markets. Yes, there will be blips in the market during election time & Vote on Account time, but we do not forsee a reversal in the trend. Also with a host of good IPOs slated for the months of February & March’04, we expect the markets to continue its current momentum.

WHY MONTHLY INCOME PLANS ?

“Debt with a slight flavour of equity “is what Monthly Income Plans have to offer. This translates into steady returns from a fixed income portfolio with the possibility of higher returns through the equity component. With the decline in interest rates over the past few years, long term debt funds have given significant returns on account of strong capital gains from bonds. However, such high returns may not be possible in the future. Interest rates in traditional savings instruments have declined significantly. Therefore, MIPs can be viewed as an attractive option, which aims at achieving slightly higher returns through investing a small portion in equities.

WHICH MIPs SHOULD BE LOOKED AT AS AN ASSET CLASS FOR A CONSERVATIVE INVESTORS WHO ARE INVESTING IN EQUITIES FOR THE FIRST TIME?

Most of the MIPs have a break up between debt & equity like 85:15, 80:20, 75:25 & 90:10 in favour of debt. What this means is that ( assuming a 80:20 scheme), the Mutual Fund can invest between 80% in debt going upto 100% in debt & can invest from 0-20% in equities. 20% limit includes any appreciation on the equity portfolio as well & hence, they will not invest the entire amount of 20% in equities. It will either be 15-17% in equity, keeping a cushion of 2-3% for any appreciation in equities so that it does not breach the 20% limit in equities.

Going by this standard practice, we recommend you to look at those schemes which have a break up of 90:10 in favour of debt. What this means is that generally the Scheme will invest upto 92-93% in debt & only 7-8% in equity. Going forward if we assume a return of 7% in debt schemes; the scheme will generate 6.5% on an investment of Rs.93/- in debt. Hence, at the end of the year your investment in debt will appreciate to Rs.99.50 to Rs.100/- ( giving you an asset protection by safeguarding your principal amount) & generating better returns from the 7-8% investments in the equities.

Assuming on a worst case scenario, equity markets fall by 50% from current levels in one year’s time; value of your investments in equities will become Rs.4/- from Rs.8/-. Hence, at the end of the year your investment in debt would have gone upto Rs.99.50 to Rs.100 ( from Rs.92 to Rs.93) & investment equity in this worst case scenario would have gone down to Rs.4. Nevertheless, you will still have a positive return of 4% in one years time.

STRATEGY OF FUND MANAGERS FOR MIP SCHEMES:

The strategy of Equity Fund Managers in the MIP plans is to give absolute returns with a view to conserve the capital rather than hold the investments for long periods & take undue risks attached to the said asset class. They also allocate a lot of IPO equities to such MIP schemes to enhance returns. Also, the debt portion of such MIP schemes has more of a flavour of Short to Medium Term Income schemes rather than an aggressive Income schemes. Hence, as we have pointed out earlier as we expect the interest rates to firm up in Mid February, debt portion of such MIPs will not bear that brunt as they will be more in the nature of Short to Medium Term Plans.

We therefore recommend investments in fresh IPOs of the MIP schemes, which will give the flexibility to the Fund Managers to create new portfolio depending on the market conditions:

Debt: Equity Options Approx. Date Closing Date

1.Birla MIP 95:05 and 75:25 First week of February

2.Deutsche MIP 90:10 and 80:20 15-01-2004 29-01-2004

3.HSBC MIP 85:15 and 75:25 20-01-2004 13-02-2004

4.Tata MIP Plus 80:20 27-01-2004 27-02-2004

5.ING MIP 80:20* and 100:00 12-01-2004 06-02-2004

Kindly restructure your portfolio based on our above recommendations to safeguard principal & optimise returns. If you need any further clarification, please feel free to contact us.