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BW Businessworld

Betting On Monthly Income

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Investing in a fixed deposit may look like a safe bet, especially when equity markets are choppy and uncertain; but high inflation can eat into your capital when it is invested in interest-bearing investments that provide monthly income. But when a fund that beats the others by a big margin comes along, it is hard to pass up the opportunity to buy it.

Meet Ashwani Kumar and Amit Tripathi, managers of the Reliance Monthly Income Plan (MIP). "We would not be surprised if the MIP sizes were to double over the next two years," they say. Reliance MIP fund has topped the charts in the Hybrid Monthly Income category and has outperformed the Crisil MIP index (5.70 per cent), giving a compounded annual return of 13.01 per cent over a three-year period.

MIPs invest in debt instruments in the primary market and make monthly dividend payments to investors; a small percentage of the investible corpus is invested in equities. This works well in a bear market, when the fund's net asset value (NAV) takes a lesser battering.

Reliance MIP is designed for large retail participation, especially from a long-term investment point of view. Over the past five years, it missed dividends in only two months, which is a consistent performance. "It is a product meant for two types of investors: people looking for the classical monthly income product, and investors who want to take on incremental equity exposure," says Tripathi.

So how did this fund do so well? The strategy has been to allocate more into low-duration instruments and preserve capital. "As we went into 2009, assets didn't do very well; we kept it mostly in 6-12 month certificates of deposit and commercial paper; incremental governmental securities were kept lower," says Tripathi.

The portfolio allocation for Reliance MIP is 80 per cent debt (minimum) and 20 per cent equity (maximum). Debt consists of money-market instruments, corporate debt securities, pass-through certificates with a duration of one to three years, and long-dated government securities. 

 Top 3 Hybrid:
   Monthly Income 

1 Reliance MIP 13.02%*

2 Birla Sun Life MIP II - Savings 5 Plan 11.45%*

3 HDFC Multiple Yield Fund-Plan 2005 9.27%*(*3-year returns)

Equity accounts for about Rs 1,700-1,800 crore of the assets under management (AUM) out of an average AUM of Rs 8,322 crore. Roughly two thirds of that equity is in large-cap stocks from the BSE 100: Maruti Suzuki, Reliance Industries, State Bank of India, etc. The remaining is in mid-cap stocks such as Aventis Pharma, Siemens and SKF Bearings. What about the next three years? There could be some reallocation into corporate bonds. "We see a healthy supply of good quality paper, so we might increase our weight in that part," says Ashwani Kumar. "But overall duration will still be below three years." With equity market volatility being as high as it is, the present mix will not change much. Kumar and Tripathi are betting big on this product, especially once the new tax regulation is introduced under the DTC (direct tax code). The cloud on the horizon? Oil prices, especially in light of recent events in the Middle East and North Africa.


(This story was published in Businessworld Issue Dated 28-03-2011)