The scale and speed of the equity market rally in recent months has caught the fancy of many investors, aggressive and conservative alike. There are many who believe markets have run-up too high too fast and entering the markets at this point is fraught with risk. 

One of the investment options for such investors is MIP (Monthly Income Plan) or Balanced Funds which have a mix of equity and debt. But are they really effective? Or is building your asset allocation mix as a part of financial planning practice a better option? 

Here we will be discussing about the effectiveness of MIP schemes as against self managed asset mix portfolio.

Best of Both Worlds

A conservative or a moderate investor might be averse to the idea of investing in equities or even an equity mutual fund at this point of time. For such risk-averse investors, there is a hybrid product such as MIP which has some portion of equity while major chunk is in debt. The question is what the difference is? Instead of investing 20% or 10% of the investment into equity; the investor invests 100% in MIP which then segregates it into debt and equity portion. Is the risk taken by an investor through MIP is lower than the equity (even if the equity investment is only 10% or 20% of the portfolio)?

The current market conditions and the way it’s being projected for future course both for equity (with the backing of positive investor sentiments and improving economic factors) and debt (anticipation of rate cuts at the monetary policy going forward) could lead to confusion among investors what is the best asset mix which can or should be created to get maximum benefit fromboth. MIPs offer good and stable returns across a period of time and more so when equity or debt is doing good, while the current situation suggest both may do well going forward and this gives even the conservative investor to sit up and notice them. 

Let’s see the performance of MIP (Average of MIP schemes) in comparison to Nifty and Composite Bond index yearly performance for the last ten years (See Stable Path).

This chart suggests that the MIP returns are closely related to the debt returns, in fact are better mostly when the equities are rising and slightly lower when the equities are down.

Tailor Made Solution

If you look at the portfolio mix of a typical MIP it is generally around 70-80% debt and remaining 20-30% in equity. If this matches one’s allocation idea, they might find it readily available investment option. These funds are hybrid breed of mutual funds for a not-so-aggressive and not-so-conservative investor and present an asset allocation which is like a tailor made solution.

If as an investor you decide on the allocation, greed for higher returns should not lead to complete overhauling of the portfolio. However, if as a moderate or conservative investor, you plan to take benefit from the equity returns, they can be added or increased as an interim allocation for a specific period or based on the targets in terms of returns. 

However, ensure that the overall portfolio has not lost on the initially well thought and well planned allocation strategy. Now, the bigger question is whether should you continue to pick the best equity and debt funds yourselves which meets your criteria or invest in an MIP fund which offers an asset allocation solution in the form of a hybrid fund. Let us look at the performance of MIP vs Mix of Equity and Debt in similar proportions.

We’ll take the average returns of all the MIP schemes in one year and compare it with average returns of multi-cap equity funds and debt funds (short term and income). For comparison we will also look at the average asset mix of all MIP schemes and same will be applied to the equity and debt portions.

If we look at the average of the portfolio composition of MIP schemes 20% is into equity, 70% into debt and almost 10% as cash (probably waiting for opportunities in both equity and debt), for calculation we will take cash as also a part of debt, however this might result in difference in returns (See Mapping Difference).

Here as per the calculation, allocation of 20% to dedicated equity funds and 80% to dedicated debt fund has delivered better returns than the hybrid fund which has both equity and debt, even though the hybrid funds also have specific fund managers for managing debt and equity portions.

If we bring in the taxation part the gap in the portfolio return and MIP return might increase further as MIP has debt taxation as the portion of equity is less than 65% which is the norm for qualifying as an equity fund. 

So under the new guidelines, capital gains from debt funds are treated as short term up till 3 years, so if in this case the fund was redeemed the next day after completing one year, the post tax returns would be much lower than that of the portfolio (See Less Tax Efficient).

Gains from the equity funds under long term capital gains is not taxable, so in the portfolio only the gains from the debt portion will come under the short term capital gains as per the tax slab of the investor.

So if we look at the tax implication on the MIP schemes it looks less attractive when compared to the equity and debt portfolio managed separately. 

However, MIP schemes has its own advantages as it is an actively managed scheme where debt and equity portion is dynamic in nature although it sticks to the range provided in the offer document, but still the fund managers have the liberty to increase the equity or debt portion based on the changing scenario which might be difficult in case of managing on own.