How to restructure your portfolio using mutual fund MIPs - Motilal Oswal
How to restructure your portfolio using mutual fund MIPs - Motilal Oswal

How to restructure your portfolio using mutual fund MIPs

What exactly do we understand by an MIP or a monthly income plan? The MIP mutual fund is a form of hybrid fund which is predominantly invested in debt and less in equity. The larger exposure to debt is intended to give stability and regular income to your overall portfolio. At the same time, the exposure to equities is meant to give the added alpha to the portfolio. The benefits of investing in MIP are that you get a combination of the stability of a debt fund with regular income potential and the alpha of equities. While an MIP will surely give you more returns than a debt fund, the returns will be lower than equity balanced fund or a pure equity diversified fund. Should we invest in MIPs in the first place?


That would depend on your investment objective
Whether to invest in an MIP or not would largely depend on your core investment objective. Here are cases where investing in an MIP can add value to you..

If you are retired and looking at some regular income then MIPs can be useful to you. The combination of equity and debt gives you substantial safety and regularity of income but with a good sprinkling of higher returns too.

If your portfolio has become too aggressive, then MIPs can be used to gradually reduce the aggressive in your portfolio. This is more likely when the equity markets have rallied sharply, as we have seen in the last 3 years.

MIPs are also useful when you want to gradually reduce your equity exposure with age and reduction of risk appetite. In fact, MIPs allow you to reduce your overall portfolio risk in a very gradual and calibrated manner.

How MIPs help in restructuring your portfolio?
One of the critical roles that the MIPs do play is in helping financial planners gradually temper your risk appetite. Your risk appetite does reduce over time and that needs to be managed. On the other hand, MIP can also be used in the reverse situation when you are overly exposed to debt and need to gradually add doses of equity to give a growth push to your portfolio.

ParticularsPortfolio Value on 01st Jan 2014Proportion of Portfolio mixPortfolio Value on 01st Jan 2018Proportion of Portfolio mixEquity InvestmentRs.25,00,00060.97%Rs.63,00,00073.26%Debt InvestmentRs.12,00,00029.27%Rs.18,00,00020.93%Liquid InvestmentRs.2,00,0004.88%Rs.2,30,0002.67%Gold InvestmentRs.2,00,0004.88%Rs.2,70,0003.14%Overall PortfolioRs.41,00,000100.00%Rs.86,00,000100.00%


As can be seen in the above table, over the last 4 years, the share of equity has gone up sharply from 60% to 73%. This has happened purely because of the stellar performance put up by equities. In the last 4 years you were originally targeting to keep your equity exposure in the range of 55-60%. However, this share has gone up and it is time to restructure. However, a straight shift from equity to debt may not be a good idea and would lead to sudden shift in portfolio mix. The answer would be to use an MIP to smoother then restructuring process. Here is how you can go about it.


Using MIPs to restructure your overall portfolio mix
In the above case we need to gradually temper the equity component in the portfolio and bring it down to around 55-60% range. If we are targeting to do it in 3 years, we can start by opting for a MIP with a 75:25 mix in debt versus equity. Let us assume that the investor removes 20% of the equity profit which will be Rs.19 lakhs and allocates it to the MIP with 75:25 mix in favour of debt. Here is how the new allocation will look..

ParticularsPortfolio Value on 01st Jan 2018Proportion of Portfolio mixNew re-allocated valuesNew Reallocated mix (%)Equity InvestmentRs.63,00,00073.26%48,75,00056.69%Debt InvestmentRs.18,00,00020.93%32,25,00037.50%Liquid InvestmentRs.2,30,0002.67%2,30,0002.67%Gold InvestmentRs.2,70,0003.14%2,70,0003.14%Overall PortfolioRs.86,00,000100.00%Rs.86,00,000100.00%

Please note that in the new mix, the equity mix includes the reduced exposure to equity and the equity component of the MIP. The debt portion includes the old debt portfolio and the debt portion of the MIP. What this achieves is that you have achieved your target asset mix (55%-60% range) by using the power of MIPs. Since MIPs have a 25% equity component in this case, you are actually smoothening your journey towards a portfolio that better reflects your risk appetite.
When your exposure to debt goes up too high and you need to increase your equity exposure, then you can use the reverse mechanism. Depending on whether you are conservative or you want to aggressive, you can either choose an MIP or equity balanced fund for the restructuring. The moral of the story is that it offers a smoother way of rebalancing your portfolio.

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