A retail investor is short of investment options. S/he is apprehensive about investing directly in stock markets because of the inherent risks and its ups and downs. Fixed income investments, on the other hand, give him low returns and sometimes not even a positive real rate of return after adjusting against inflation. The retail investor is flummoxed.
Monthly income schemes or MIS - a mutual fund product bundling both debt and equity - provide an optimal solution to the retail investor. Such a portfolio is typically overweight on debt, investing 75-85% of the fund`s corpus in various debt instruments. This is aimed to provide stability of returns and also to preserve the invested capital over a medium to long investment horizon. The balance is invested in equity, providing the investor with a more return vis-a-vis traditional debt instruments. Together, these disparate asset classes provide consistent returns to the investor even in volatile times.
Investment philosophy
Of the two classes of investments, while the debt portion of the portfolio primarily provides stability of returns, the equity portion provides growth in the form of appreciation. This way, the investor concerned can participate in a stock market rally without being fully exposed to its vagaries.
Monthly income schemes of mutual funds stick to the mandate of a fixed asset allocation. Therefore, while investing in monthly income schemes, a prospective investor ought to evaluate the returns of the entire portfolio and not individual asset classes. Come to think of it, even a fall in equities by over 25% would not result in negative yield of the scheme over a period of 18 months due to returns from the debt portion. This feature alone provides a huge psychological comfort to the risk-averse investors.
Regular pay-outs
What`s more, Monthly Income Schemes of mutual funds provides regular cash flows in the form of dividends. For many investors, it is not the quantum of cash flow which matters but its predictability. Elderly citizens who have predictable expenses at monthly intervals find such schemes ideal since Monthly Income Schemes provide monthly cash flows to meet such expenses.
FDs Vs. MIS
FDs with banks also provide regular income. But, these do not provide growth, thanks to the equity component, which Monthly Income Schemes offer to counter inflation. Plus, monthly income schemes of mutual funds provide tax efficient returns. The interest earned from various fixed income instruments including bank deposits are taxable at the hands of investor at his marginal rate of taxation, which can be as high as 30.99%.
Compared to FDs, MIS of mutual funds are more tax efficient. MIS dividends are tax free at the hands of investors. The mutual fund, of course, pays a dividend distribution tax of 12.5% (in addition to the surcharge and education cess). This compares favorably with the marginal rate of taxation associated with FDs.
Prospective investors can also choose growth option, where the investor can get cash flows by redeeming units systematically through systematic withdrawal plans. The tax liability in this case would be only 20% with indexation or 10% without indexation, whichever is less on only the capital gains.
UTI`s MIS offerings
UTI provides two options - UTI MIS and UTI MIS Advantage with different asset allocations. The 15% and 25% equity allocation with the balance portion invested in debt helps in providing consistent returns even in volatile times. Past statistics show that in any 18-month period, both the funds have always provided positive returns. The debt portion of both the funds consists of bonds with a 1-3 years maturity aimed to generate regular income with capital preservation, focusing on Y-T-M play without taking active duration calls.
In conclusion
To sum up, since equity provides returns in excess of inflation over medium to long-term investment horizons, monthly income schemes blending equity with a predominance of debt provide the ideal exposure to the risk-averse investor. Investing in monthly income schemes of mutual funds is, thus, common sense investing.
The article is contributed by R Raja, head of products, UTI Mutual Fund. The views expressed here are personal and not necessarily of the fund house.
No comments:
Post a Comment