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MONTHLY income plans (MIPs) of mutual funds have been poor performers in the past three years. They didn't fulfil the promise of generating stable returns marginally above debt funds. Conservative hybrid funds, as a category, including MIPs, have offered 5.73 percent and 6.37 percent, respectively, in the past year and three years ended October 18. So is it time to get out of these schemes? It is the time you sell your investments. If you want to invest in a mix of debt and equity, it is better to invest in dedicated equity funds and debt funds in a ratio that you prefer. In fact, many investment advisors have been advising their clients against investing in MIPs, as they believe MIP has failed as a concept.

Not Just Performance

Poor performance is just one of the many factors that have gone against MIPs. The tax treatment of dividend is a big dampener. Dividend distribution tax on these funds has been hiked to 25 percent from 12.5 percent. This makes investing in the dividend option of these schemes unattractive. The effective rate of tax on dividends works out to 28.33 percent for individuals and HUF investors in debt mutual funds. MIP is taxed as a debt fund. Many investors keen on regular income have invested in the dividend option of MIP. For them, the posttax returns from these plans are not attractive, says Rupesh Bhansali. He advises existing investors to exit MIPs. While many invested in the growth plans of MIP to benefit from the best of both asset classes of debt and equity, the funds have not lived up to expectations. These funds have been delivering in intervals. Both debt and equity funds have done well in the past six months, but MIPs failed to catch up. It is better to invest in a mix of equity and debt funds than being in an MIP, he says. The debt component of MIP is not dynamically managed. Most fund managers employ static strategy which results in lower return on the debt component compared to the returns of debt funds managed by the same fund managers. Less money in these schemes compared with a debt fund is another factor that leads to lack of focused efforts by fund managers.

Though these schemes have been poor performers, do not jump and invest all your money in a fixed deposit or a debt fund. Experts advise sticking to your asset allocation. If you want to invest in a combination of equity and debt, you should switch 80 percent of your money to a debt fund and 20 percent to an equity fund.

Equity is more predictable in long term and debt is more predictable in short term. You should invest in equity funds with a longterm track record. If you are a savvy investor, you may invest in long-term gilt funds if you expect interest rates to go down, and invest in ultra shortterm bond funds in rising interest rates scenario. If you are not sure about how the interest rates may behave and you are in volatile time such as the one we are going into, consider a well-managed short-term bond fund.

Investing in a combination of equity and debt fund also saves you money. Typically, debt funds charge less than MIPs. Equity schemes charges more, but that can be justified because of the prospects of superior returns. This means almost 80 percent of your money (if invested in debt) incurs lower fees, which in the long run results in higher portfolio returns for you. Also, the returns generated by equity schemes do not attract long-term capital gains. This brings down taxation on the portfolio against 20 percent tax post indexation on the capital gains earned by MIP in the long term

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