The Hindu Business Line : MIPs - are investors aware of risks?

SEVERAL mutual funds have filed offer documents with the Securities and Exchanges Board of India for launching monthly income plans (MIPs) with higher equity limits. Tata Mutual Fund, for instance, is slated to launch Tata MIP Plus Fund, where the equity cap is 20 per cent; the existing Tata MIP allows 10 per cent exposure to equities

"The sales people do not spend time in advising customers about the presence or the level of equity in these schemes. Investors switched to MIPs after the volatility experienced in income funds. Though returns were very high last month, because of the peaks the Sensex scaled, investors are not aware of the "double risk" they are taking — risk in debt and risk of equity. This mode of sales indicates that the industry losing investors is merely a question of `when', says Mr Rana Kumar, Karvy Distribution.

Asset management companies prefer not to enter the nitty-gritty of the sales process. The assumption is that the distributors are selling the products to relevant and informed investors.

Birla Sun Life AMC has filed offer documents with SEBI for Birla MIP Gold, which allows 5 per cent to 25 per cent in equity. This complements its existing MIP, which has an equity cap of 15 per cent. Mr Ravi Sharma, Head Marketing, Birla Sun Life AMC, says that the products are devised to handhold a retail investor who wants to move from income funds to equity funds. MIPs with various exposures to equity are a step up to balanced and subsequently diversified equity funds, he says.

Large distributors claim that they are not aggressively marketing MIPs as the product straddles a grey area between risk and returns. Though the equity market is showing high volatility now, the panic buttons have not been pressed yet. If the index falls to sub-5500 levels, small investors will beat a quick exit from MIPs, says Mr Kumar.

Financial planners agree that the step up method of investing is in theory an ideal way into equity for small investors. The problem in the Indian scenario is that investors are not really made aware of how long they should tie their money in, in order to enjoy high returns.

On the first signs of volatility investors tend to flee the market. Before offering many variants of the product, AMCs must educate the investor about the investment tenure and realistic returns; in the absence of that MIP is a bubble waiting to burst, they say.

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