Overvalued markets? Low-risk monthly income plans can be your true saviour

NEW DELHI: Investors have poured money into equity schemes in a big way in the past three months. A Crisil report says assets under management (AUM) of equity schemes went up 23.5 per cent in the July-September quarter, much faster than the 8 per cent rise in the Nifty. But many small investors are still dithering because the benchmark indices are close to their all-time highs. Meet Puneet Narang, a 34-year-old finance professional who has never invested in stocks. "I don’t like risking my money," he says, preferring post office schemes and other safe options. In Mumbai, banking professional Arijit Sen follows a similar strategy, but for different reasons. His previous experience with stocks has not been very good, so he has put his portfolio on a 100 per cent debt diet. He is looking at fixed deposits and insurance policies to save for his retirement and other goals.

Ultra-cautious investors such as Narang and Sen may be missing out on an opportunity to build wealth if they stay away from stocks. Experts, and statistics, say equities have the greatest potential to create wealth in the long term. But the sharp rise in the benchmark indices in recent months have only made these riskaverse investors more cautious. For investors like them, monthly income plans (MIPs) from mutual funds can be a low-risk entry point to the equity markets.

Conservative allocation

MIP funds follow a conservative investment strategy, allocating only 10-25 per cent of their corpus to equities and putting the remaining 75-90 per cent in the safety of bonds and other debt instruments. This is why the returns from this category are fairly attractive when the going is good and relatively stable over the long term. "These funds will give investors good returns if stock markets do well, but they will also protect the downside because of the limited exposure to equities," says Vidya Bala, head of research.

We have identified the five best MIP funds for you. All have been assigned the highest rating (five stars) by Value Research in the debt-oriented conservative allocation category.

Higher returns, lower tax
In the long term, MIP funds can give better returns than debt instruments such as fixed deposits and small savings schemes. But that is not the only advantage they offer over these debt investments. MIP funds are far more tax efficient. The interest earned on fixed deposits and National Savings Certificates (NSCs) is fully taxable at the normal rate. For a person in the 30 per cent tax bracket, the posttax returns from a fixed deposit that offers 9 per cent is actually 6.3 per cent. Worse, this income is taxed every year even though he may get it only after the deposit matures. On the other hand, the gains from MIP funds are taxed only when the investor redeems the investment-.During times of high inflation, indexation can reduce your tax to almost nil. The best part is the tax is deferred indefinitely till the investor withdraws the investment.