Monthly Income Plans: Should investors put money in?

Gold or MFs: Which is better for long-term investment?

Below is the verbatim transcript of Rustagi's interview with CNBC-TV18.

Q: MIPs or monthly income plans. Despite being an ideal product for retail investors, MIPs have lost ground over the last few years. Are MIPs still relevant for retail investors; is it still an option to put money in?

A: MIPs are essentially debt oriented hybrid funds wherein the significant part of the portfolio is invested in debt instrument and a part of the portfolio is invested in equities. The role of debt instrument in the portfolio is to generate regular income as well as create stability whereas equities aim to generate growth. As a combination, it has a potential to do better than traditional option like fixed deposits, bonds and debentures and for someone who invest for longer period or for a year or more and considering that mutual funds are more tax efficient, the post tax return can be much higher. Of course, considering that a part of the portfolio is invested in equity, one has to content with some amount of volatility from time to time.

The general perception about MIP is that these are ideally suited for someone who wants regular income but in reality MIPs can be great option for someone who is looking for capital growth over a period of time. When we talk about MIPs, as I said they have lost ground over the last couple of years and the reason for that is because equity market have been a bit volatile and that reflects in the performance and unfortunately because many investors invest when the market is good because that is when the returns looks good, they feel a bit disappointed and the second reason why MIPs have lost ground because there was a recent hike in the dividend distribution tax, which has made dividend payout option unattractive for most of the investors.

Q: What kind of returns can investors expect from these funds now?

A: If you look at the performance of MIP as a category over five-seven year period. They have given annualised return of around 8 percent but if you look at the leaders in the category like Reliance Monthly Income Plan or HDFC Monthly Income Plan - Long Term , Canara Robeco Monthly Income Plan and Birla Sun Life MIP II -Savings 5 have generated annualised return of around 10 percent. So, some one who is looking to build capital over a longer period with a portfolio that has a restricted exposure to equity, MIP remains a good bet. 

Caller Q: Can invest Rs 10,000 per month for children's benefit. Please advise allocation for 20 years?

A: Your time horizon is 20 years and you will be investing on regular basis. Therefore, the right option for you would be to look at equity funds and invest through systematic investment plan (SIP) because when you invest through SIP, the volatility that exists in the market place is taken care of. Here for a time horizon of 20 years if I assume annualised return of around 12 percent, you can hope to build a corpus of around Rs 95 lakh with your investment of Rs 10,000 per month. So, it will be almost there as far as target is concerned.

Therefore, couples of funds that you can consider are ICICI Prudential Focused Bluechip Equity Fund , which is a pure largecap fund and IDFC Premier Equity Fund which is essentially a midcap fund.