Extreme volatility at the bourses since the start of 2011 and concerns of a northward bias in interest rates are just two of the reasons that have led to the BSE Sensex shedding nearly 2,000 points in just a fortnight.
So, what does a conservative investor who wants a 'debt rate' plus return but would still not like to be fully exposed to the risks associated with investments in equity do? One option is the Monthly Income Plans ( MIPs), which are hybrid debt instruments, offered by mutual funds. They are hybrid since they offer some equity exposure while at the same time seeking to safeguard investors' capital by investing in debt instruments that generally have a good credit rating.
Unlike pure fixed income instruments, which are meant for risk-averse investors, MIPs are suitable to those who have the stomach to take on a higher risk profile than pure debt investors. This is because most MIPs are mandated to invest up to 30 per cent in equity and related instruments of firms, which have the potential to give slightly higher returns than pure debt instruments that constitute 70- 80 per cent of the total assets under management ( AUM).
MIPs also have the intent to offer income on a regular basis, that is, monthly income to investors. However, the monthly income is not assured as the fund's performance and in turn the returns generated are market-determined factors. Needless to say, higher the equity component, higher the risk an MIP would entail.
As with other mutual fund investments, investment options are available in dividend and growth plans and dividend payouts, maybe of different time intervals (monthly, quarterly, half yearly or annually). Options can be selected based on the risk appetite and the quantum of liquidity required at regular intervals.
However, being debt schemes, dividend distribution tax (DDT) of 12.78 per cent is levied if a dividend is declared. Similarly, short- term capital gains (STCG) tax is chargeable on units sold within a year. The net gain will be added to an investor's taxable income and taxed as per the applicable tax slab of the investor.
In case of long- term capital gains (LTCG), where units are sold after a one-year holding period and gains accrue, the tax rate applicable is 10 per cent without indexation benefit or 20 per cent with indexation benefit, whichever is lower.
Some of the better performing MIPs in recent times include HDFC MIP- LTP, Reliance MIP and Canara Robeco's MIP. One common aspect of all these MIPs is the sound credit quality of its debt instruments and lower sensitivity to interest rate changes as indicated by their average maturity and duration. Moreover, the equity portfolio comprises fundamentally sound firms, most of which are blue-chips.
Given that deep down most Indian investors simply do not have the stomach for a falling equity market, the MIP investment option appears a viable one as it combines relative safety with a slice of the forbidden fruit, equity.(Ashok Kumar is promoter, theIPOguru. com & director, Lotus Knowlwealth)
Courtesy: Mail Today