Hybrids like balanced funds and Monthly Income Plans (MIPs) seem to have lost out in the present Bull Run. With equity markets surging, diversified equity funds have emerged as undisputed favourites with investors.

At Personalfn, we believe that hybrids (powered by their flexibility to invest across asset classes), can offer immense value to investors' portfolios and should find a place therein. We present a 5-step strategy for investing in the MIP segment.

1. No assured returns

Investors would do well to understand that investments in MIPs don't offer assured returns. The seemingly deceptive name, i.e. 'monthly income' has done a huge disservice to the segment.

Investment advisors were at times guilty of peddling schemes to gullible investors under the guise that their investments would yield assured returns. Nothing could be farther from the truth. MIP offerings from mutual funds shouldn't be confused with the Post Office Monthly Income Scheme (POMIS) from the small savings segment which offers assured returns.

2. A higher equity component doesn't make the fund better

Another common misconception is that a higher equity component makes the offering a better one. MIPs offer an equity component ranging from 15% to 30%. In fact, the wide choice available is one of the biggest advantages of the segment. Investors can select a variant that best fits into their portfolio and matches their risk profile.

While a higher equity component can aid the fund in offering higher returns, the same can also enhance the MIP's risk profile.

3. Check the debt portfolio's average maturity

The present rising interest rate scenario has made investments in conventional debt instruments rather unattractive. As a result, fund managers have shown a marked preference for instruments with a low maturity profile.

Such instruments are less susceptible to volatility in the markets and hence, are better equipped to offer a degree of stability to the fund. A well-managed MIP would ideally hold a low average maturity (around 12 months) in the present scenario.

• Rank the top-performing MIPs

4. Examine the fund's debt portfolio

An MIP is a pre-dominantly debt offering, hence the debt portfolio's composition would have a significant bearing on the fund's performances. In the present scenario, when interest rates are on the rise, a portfolio dominated by floating rate instruments would be ideal.

Unlike conventional debt instruments where the coupon rate is fixed, the coupon rate on floating rate instruments is variable i.e. it is realigned in line with a predetermined benchmark rate. Hence in a rising rate scenario, such instruments are best equipped to clock positive returns.

Another factor to be considered is the instruments' credit rating. A portfolio dominated by AAA/similar rated instruments (which indicate the highest degree of safety) would be indicative of the fund manager's intentions of not taking on too much risk. Conversely, a lower rated portfolio would point towards the intent of clocking higher returns by taking on commensurate risk.

5. Opt for the quarterly dividend option

The quarterly dividend option gives the fund manager more breathing space as compared to the monthly dividend option. As a result, the probability of receiving a dividend is much higher. Hence investors would do well to select the quarterly dividend option.

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