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MIP 2000 is losing its sheen

Aabhas Pandya

The Unit Trust of India plans to launch the second monthly income plan for year 2000 shortly, apparently undeterred by the hike in dividend tax from 11 to 22 per cent.

The monthly income plan or MIP from UTI is a five-year, closed-end plan with an assured return for the first year.

The assured returns for the next four years will be declared at the beginning of each subsequent year, linked to the then prevailing interest rate scenario. MIP 2000, which closed its initial public offering or IPO on January 30, 2000, had assured a return of 10.25 per cent, payable monthly. This translates into an annual return of 10.75 per cent.

The second MIP from UTI is now expected to open for subscription in April 2000. UTI is yet to decide on the assured payout for the first year. However, the return from MIP 2000-II will definitely be lower than 10.25 per cent, assured in MIP 2000, given the hike in dividend tax from 11 to 22 per cent and assuming that interest rates continue to remain soft.

UTI is likely to peg the assured returns for the monthly option at around 9.6-9.75 per cent. This gives an annualised return of 10.2 per cent, which is a good 100 basis points more than the one-year bank deposit, and 55-60 basis points more than short-term debt funds.

However, to earn a monthly return of 9.75 per cent, UTI will have to generate a return of around 14 per cent from its portfolio. This is by no means an easy task, considering that bonds from Indian Oil Corporation or IOC and Housing Development Finance Corporation or HDFC -- both triple A -- recently mobilised 5-year money from the market at 10.85 per cent and 10.78 per cent, respectively.

The fund could dilute credit quality to earn higher returns, besides generating optimum returns from the equity component.

The MIP offers monthly, annual and cumulative options. All the three options now entail a minimum investment of Rs 10,000, unlike previous MIPs where the minimum investment in the cumulative option was Rs 5,000.

It is surprising that UTI has doubled the minimum investment in the cumulative option since this has become the most attractive investment alternative under MIP after the doubling of dividend tax. In the cumulative option, investors will have to pay only 10 per cent long-term capital gains tax on redemption of investments at the end of five years.

The MIP will invest up to 30 per cent in equities, while it has to invest a minimum of 70 per cent in debt instruments. It is going to be a tightrope walk for the fund manager. Given the drop in interest rates and higher dividend tax, the fund will have to maximise returns from its equity portfolio to meet the assured returns.

On the other hand, UTI cannot drastically cut the assured return since this will make MIP unattractive.

The MIP series is an important product. UTI mobilised Rs 40 billion in 1999 through this series. However, the monthly income plan has lost its charm primarily due to the decline in interest rates which forced UTI to bring down the coupon, the term of assurance which is now being revised every year, and the increase in dividend tax.

Source: Value Research

Mutual Funds

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