MFs hardsell MIPs as market turns volatile

02-Mar-2010

Woo Investors Looking For Low Risks With Higher Returns Than Fixed Deposits

AN OPTIMISTIC outlook for short-term bonds and the recent volatility in equities have given mutual funds and distributors a chance to push monthly income plans (MIPs) to investors in the past couple of months. But a section of the distributors believes MIPs have been 'mis-sold' as a mere makeshift product for investors wanting to protect their capital and partly benefit from movements in equities in uncertain times. MIPs invest at least 70-75% of their corpus in debt and the rest in equities.

The 'mis-selling' has come in the form of linking the utility of the product with the volatile market conditions. Mutual funds have officially positioned the product as one where investors, particularly the risk-averse, can derive higher returns than fixed deposits at lower risks over a period of time because of the equity exposure. "We believe the way MIPs have been sold to investors recently was not the best interests, with the backdrop being a heated equity market and a tentative debt market," said Akhilesh Singh, head-wealth management, Emkay Global Financial Services. MIPs invest in debt paper, mostly corporate, or money market instruments with a maturity of approximately 24-42 months. Fund managers of these schemes shuffle the money based on the interest rate outlook. Following the higher-than-expected hike in cash reserve ratio (CRR) by the Reserve Bank of India (RBI) last month, they shifted the focus to paper with around two-year maturity on expectations the absorption of money over the next couple of months could drive up rates in the short term.

Distributors have been able to impress upon investors that MIPs, with higher exposure to short-term paper and a small bets in the equity market, churn better returns than pure equity or debt funds in a volatile period. The commission that mutual funds offer to sell MIPs has been the key to distributors hardselling the product. Mutual funds pay distributors around 1-1.1% of the money collected in MIPs as commission, which is almost as high as the fee for equity scheme sales at 1.25%. Mutual funds are not complaining, as the ban on entry load in equity schemes in August last year has impacted money flows into their funds.

"Historically, MIPs have been a 'missold' product. It would be mis-selling if it is sold with a 3-6-month horizon, as investments in MIPs should be done with at least a one-year perspective," said Sunil Jhaveri, chairman, MSJ Capital, a New Delhi-based distributor. According to Mr Jhaveri, MIPs of Reliance Mutual Fund, ICICI Prudential and DWS Twin Advantage are better managed. In the past one year, the average return from the MIP category has been 15.5%, according to Value Research, a mutual fund tracker.

PLAYING IT SAFE

MIPs invest at least 70-75% of their corpus in debt and the rest in equities. MIPs invest in debt paper, mostly corporate, or money market instruments with a maturity of 24-42 months. Distributors impress upon investors that MIPs churn better returns than pure equity or debt funds in a volatile period. In the past one year, the average return from the MIP category has been 15.5%.

Source : www.insuremagic.com