{"id":3811,"date":"2013-11-07T15:09:22","date_gmt":"2013-11-07T09:39:22","guid":{"rendered":"https:\/\/blog.fundsindia.com\/blog\/?p=3811"},"modified":"2013-11-07T15:09:22","modified_gmt":"2013-11-07T09:39:22","slug":"why-your-mips-underperformed","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/mutual-funds\/why-your-mips-underperformed\/3811","title":{"rendered":"Why your MIPs underperformed"},"content":{"rendered":"

When debt funds comfortably delivered 8-10% returns in the last \u00a0one year and monthly income plans (MIP) struggled to reach an average 6%, you may wonder whether you should own a MIP in your portfolio.<\/p>\n

Before you decide on this, let\u2019s take a look at why some of the top performing MIPs under performed and a few other, lesser known, funds in the same category rose in the performance chart.<\/p>\n\"mip\"<\/a>\n

Lack luster debt portfolio <\/b><\/p>\n

MIPs are hybrid debt-oriented funds which hold a majority in debt and 15-25% in equities. Some hybrid funds also hold as much as 40% in equities.<\/p>\n

The debt portfolios of many MIPs currently have an average maturity of over 5 years. Funds such as Reliance MIP and HDFC MIP LTP have an average portfolio maturity of 7 years while it is as high as 9 years for others such as IDFC MIP.<\/p>\n

That means they hold more longer-dated debt instruments, typically government securities and long-dated bonds. A number of them upped their average portfolio maturity in the early part of 2013 as there were indications of interest rates falling; which in turn could trigger a price rally, especially in longer maturity instruments.<\/p>\n

But given that the yields have been moving up since the sudden liquidity tightening measures by RBI and post the 2 repo rate hikes, debt portfolios with longer maturity took a beating. Simply put, the debt call taken by many of these fund houses in their hybrid funds did not work.<\/p>\n

So why are such funds not moving to shorter maturity now?<\/p>\n

One, because it would amount to booking losses or not making any gains on the chunk of their longer dated securities. Two, it may be rather late in the day to buy short-term instruments whose yields have already fallen quite a bit (after MSF rates were cut twice in the last 3 months). Also, a few more months of holding on could mean gaining on a possible gilt rally when yields do ease.<\/p>\n

Hence an under performing debt portfolio together with lackluster equity performance (pure equity funds themselves, on an average, managed just 6.5% in the last 1 year) dragged these schemes down.<\/p>\n

That said, funds such as BNP Paribas MIP, Edelweiss MIP or SBI Magnum MIP Floater, that held either cash and cash equivalents (treasury bills, reverse repo) or very short-term instruments managed much better returns.<\/p>\n

But these funds do not have a long enough track record or have underperformed (SBI Magnum MIP Floater for instance) over longer periods. Hence, their performance record, per se, may not provide much comfort for long-term investment.<\/p>\n

What should you do?<\/b><\/p>\n