The rise and fall of MIP

Before SEBI scheme recategorisation in 2017, there was a lot of emphasis on selling Monthly Income Plans (MIPs). The mandate of these schemes was to invest 70-80% of their corpus in debt instruments and offer a superior alternative to FD investors seeking regular income.

However, post 2017, things have changed completely. “While the scheme documents never guaranteed anything, the schemes were advertised as something that would give regular income to investors. Hence, many MFDs distributed these products to retirees,” said MFD Ritesh Sheth of Tejas Consultancy.

“There was a time when MIPs sold like hot cakes. I remember these schemes were marketed as the scheme that offered 1% monthly returns to investors. As this became a success, more and more fund houses advertised MIPs as a category that suits pensioners or conventional investors who are risk-averse and need monthly or regular income,” said Mumbai MFD Sadashiv Arvind Phene.

Of late, many MIPs have failed to generate regular income. Fund managers and distributors point out that subdued returns in equities, high expense ratio and series of credit events have impacted the category adversely.  

“The mandate of the fund is to invest 10-25% of its total assets in equity & equity related instruments. This has played a major role in the category’s underperformance,” said Avnish Jain, Head-Fixed Income, Canara Robeco MF.

“Besides, this category has a higher expense ratio as against pure debt fund categories. Most schemes have an expense ratio of 1.5-2% in this category, which impacts the net return of the fund,” said Dwijendra Srivastava, CIO – Debt, Sundaram MF. 

In addition, many fund houses have taken considerable credit risk in their MIP schemes to generate monthly income. But with a series of credit events their plan did not work, said Nashik MFD Ajay S. Kale.

MIPs which are now known as the ‘Conservative Hybrid Fund’ following SEBI’s re-categorisation of MF schemes in 2017 have underperformed severely. There are as many as 21 schemes in this category and not a single scheme has outperformed its benchmark in 1-year, 3-year and 5-year time horizon. Further, only 3 schemes have offered more than 7% return in the last 3 years. (AMFI data as on Oct 15 NAV of these schemes)

Over the last 18 months i.e. from April 2019 to September this year, the category has witnessed net outflows on 16 occasions. AUM of this category has also declined by nearly 28% to Rs 11,118 crore as of September end this year from Rs 15,401 crore in April 2019.

Ritesh Sheth points out that the post taxation returns make the category further unattractive at this point. “Since many schemes in this category have delivered suboptimal returns, investors relying on MIPs for monthly income end up with less than inflation returns post tax. In addition, there are many schemes in this category which have not given any dividend or monthly income for the last one year.”

Now, many MFDs and RIAs feel it is better to stay away from this category. Suresh Sadagopan of Ladder 7 Financial Advisories said that he does not recommend this category to his clients as it is difficult to ascertain what went wrong in the scheme - whether the equity part did not work or the debt part. 

Kochi MFD Shiney Sebastian of Affluenz Financial Services has a similar view on this category. She recommends her clients to invest in pure equity and debt funds based on their risk appetite.