High accruals, indexation benefit and removal of the tax disadvantage are three near term reasons for investing in MIPs before 31st March says Manish, even as he spells out the longer term case for the category on the back of encouraging developments that augur well for the deepening of the corporate bond market.

WF: What is the investment case for MIPs and why now?

Manish: Of late a couple of developments in the capital market space has boded well for MIPs in general. To begin with the Reserve Bank of India has issued guidelines to nudge corporates access bond market. Also, SEBI is expected to consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market.

Further, In India, most regulators permit bonds with the ‘AA’ rating only as eligible for investment. However, in Budget 2018, the Finance Minister has proposed to move from 'AA' to 'A' grade ratings, which is a positive development for the debt market. So, it is likely that the government and concerned regulators are likely to take necessary action.

The other aspect which makes MIP attractive is the recent change in the equity taxation regime. Investments in equity and equity oriented funds to be taxed @10% without benefit of indexation on Long Term Capital Gains (LTCG) exceeding Rs. 1 lakh.

As a result of the above mentioned developments, we believe that with the changes in equity and equity oriented funds taxation post budget and government's efforts to improve bond market by various initiatives, Monthly Income Plans can be considered as an attractive investment option.. We have recommended investors to invest in a debt oriented hybrid product like ICICI Prudential MIP 25 before March 31st to benefit from higher accruals on the debt side as the yields are at an elevated level and to take indexation benefit, under the prevailing tax laws.

Snapshot of Recent Developments

Source: Union Budget 2018-2019, RBI

WF: How are you managing the debt component of your MIP 25 in this rather challenging phase for fixed income markets?

Manish: ICICI Prudential MIP 25 (An Open Ended Income Scheme. Monthly income is not assured and is subject to the availability of distributable surplus) actively manages duration. In the last one year the duration has been in the range of 3 to 6 years. As of January 31, 2018 modified duration for the scheme is 3.14 years. The average maturity of the scheme has reduced from 7.26 years on January 31, 2017 to 4.54 years on January 31, 2018. MIP 25 aims to maintain duration between two to five years.

In terms of issuer concentration, as of February 28, 2018, 92.23% of Debt Portfolio is in Sovereign Securities, AAA and Equivalent, AA and Equivalent, A and Equivalent securities. 4.56% is in CBLO, Current Assets & Others.

WF: What is your outlook on debt markets over the next 12-18 months and where do you see the best opportunities now?

Manish: From a medium-term perspective, we continue to maintain a neutral stance on yields. Of late, the 10-Year yields have been volatile and rose to a two-year high of 7.77% in the month of February 2018. On the macro front, we believe inflation is expected to average around 5.5% in the first half of FY19 with a mild upside risk. Crude oil price is another variable to watch out for.

Going into 2018, given the current market conditions, it’s important that investors maintain their asset allocation by taking adequate exposure in to debt schemes. In addition to MIP 25, we recommend investors to invest in accrual schemes as they offer relatively higher yield-to- maturity. Investors can consider investing in ICICI Prudential Regular Savings Fund which focuses on accrual strategy. Investors who aim to benefit from volatility could consider investing in ICICI Prudential Long Term Plan.

WF: What proportion of the fund is currently invested in equity and how do you move the equity allocation between 10% and 25%?

Manish: As of January 31, 2018, 25.11% of portfolio is invested in equities and equities related instrument. Equity Portfolio is well diversified across sector with autos, banks/finance and consumer non-durables bearing the highest sector weights. In terms of allocation, the decision made is on a tactical basis rather than any predefined ratio.

Source: MFIE. 36 Months Daily Average Rolling Returns/Std Deviation for the period of 31st March 2007 to 21st February 2018. Past performance may or may not be sustained in future. The above table is for illustrative purpose only. The information contained herein is solely for private circulation for reading/understanding of registered Advisors/ Distributors and should not be circulated to investors/prospective investors.

WF: Is equity likely to underperform debt in 2018? What is your equity outlook over the next 12-18 months?

Manish: It is impossible to foresee which asset class is likely to perform better. Earnings growth outlook seems positive led by supportive global growth, improving capex, fiscal spending, and buoyant consumer demand. However, headwinds such as higher global interest rates, rise in crude prices, limited fiscal flexibility as reflected by rising bond yields, and events in the run-up to the 2019 elections could keep markets volatile.

Riskometer & Disclaimer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

The information contained herein is only for the reading/understanding of the registered Advisors/Distributors and should not be circulated to investors/prospective investors. All data/information in this material is specific to a time and may or may not be relevant in future post issuance of this material. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (the Fund), ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The sector(s)/stock(s) mentioned in this communication do not constitute any recommendation of the same and ICICI Prudential Mutual Fund may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. Nothing contained in this document shall be construed to be an investment advise or an assurance of the benefits of investing in the any of the Schemes of the Fund. Recipient alone shall be fully responsible for any decision taken on the basis of this document

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