Monthly income plans (MIPs) of mutual funds, typically, invest almost 85% of their assets in debt and the remaining portion in equity. Equity investment, though riskier, is expected to yield higher returns during market rallies. Compared to pure debt schemes (bond schemes), MIPs should have performed better over the long term considering the exposure to equity.
As many as 15 MIPs were launched between 2009 and 2012. We compared the performance of these schemes over a one-year and two-year period ending 31 January 2013. When the interest rate goes sideways to down, and equity markets go sideways to up, MIPs are expected to more than meet their investment objective. In the past two years, the Reserve Bank of India (RBI) cut the benchmark interest rate twice by a total of 75bps (basis points). The Sensex went up by more than 15% for the one-year period ending 31 January 2013. This should have made a good case for MIPs; but here is how they actually performed.
The CRISIL Composite Bond Fund Index delivered 9.35% over the same period. The top 20 large-cap schemes delivered an average return of over 19.68% and the top 20 bond schemes delivered an average return of 11.25%. However, out of the 47 MIPs, just 16 were able to beat the average of the top 20 bond schemes, despite investing in equities. The average allocation of the top 20 MIPs to equity was around 20% over the year. If you had created a hypothetical portfolio with 80% invested in the top 20 large-cap schemes and 20% in the top 20 bond schemes, the average return would have worked out to 12.94%. There were just four MIPs that were able to better this return.
The returns over two years are no different. Equity schemes underperformed debt schemes. The top 20 MIPs delivered a return of 9.55%, whereas the top 20 bond schemes delivered a return as high as 10.75%. The returns of top 20 equity schemes were around 7.29%. Had you created a hypothetical portfolio (as mentioned above), just three MIPs would have performed better than the portfolio.