It may be time for you to dump monthly income plans and bet on equity-debt combo

Monthly income plans (MIPs) of mutual funds have been poor performers in the past three years. They certainly didn't fulfill the promise of generating stable returns, marginally above debt funds. Conservative hybrid funds, as a category, including MIPs, have offered 5.73% and 6.37%, respectively, in the past one year and three years ended October 18.

The numbers call for a decision: Is it time to get out of these schemes? "It is the time you sell your investments," says Feroze Azeez, director-investment products, Anand Rathi Private Wealth Management. "If you want to invest in a mix of debt and equity, it is better to invest in dedicated equity funds and debt funds in a ratio that you prefer," he adds. In fact, many investment advisors have been advising their clients against investing in MIPs, as they believe MIP has failed as a concept.

NOT JUST PERFORMANCE

Poor performance is just one of the many factors that have gone against MIPs. And tax treatment of dividend is a big dampener. "Dividend distribution tax on these funds has been hiked to 25% from earlier 12.5%. This makes investing in dividend option of these schemes an unattractive proposition," points out Rupesh Bhansali, head-mutual funds, GEPL Capital. The effective rate of tax on the dividends works out to 28.33% for individuals and HUF investors in debt mutual funds. MIP is taxed as a debt fund. Many investors keen on regular income have invested in dividend option of MIP. And for them, the post-tax returns offered by these plans are not at all attractive, adds Rupesh Bhansali. He advises existing investors to get out of MIPs.

While many invested in growth plans of MIP to benefit from the best of both asset classes of debt and equity, the funds have not lived up to the expectations. "These funds have been delivering in intervals," says Abhinav Angirish, managing director, investonline.in, an online mutual fund distribution entity. He points out that both debt and equity funds have done well in the past six months, but MIPs failed to catch up. It is better to invest in a mix of equity and debt funds than being in an MIP, he says.

Investment experts also say that the investment strategy of MIPs is not working anymore. "The debt component of the MIP is not dynamically managed. Most fund managers employ static strategy which results in lower return on the debt component of MIP compared to the returns of the debt funds managed by the same fund managers," points out Feroze Azeez. Less money in these schemes compared to a debt fund is another factor that leads to lack of focused efforts by fund managers, he adds. The high expense ratio incurred by most MIPs further brings down the returns for investors.

TREAD CAUTIOUSLY

Though these schemes have been poor performers, do not jump and invest all your money in a fixed deposit or a debt fund. Experts advise sticking to your asset allocation. "If you want to invest in a combination of equity and debt, you should switch 80% of your money in a debt fund and 20% of your money in an equity fund," says Abhinav Angirish. You should consult your advisor to choose the right funds.