Reliance Monthly Income Plan: Avoid

Recommendation: Avoid

Aarati Krishnan

THE Reliance Monthly Income Plan, open for subscription, is an open-end scheme modelled on the lines of UTI's popular Monthly Income Plan series.

It proposes to invest around 85 per cent of its assets in debt instruments with a 15 per cent allocation to equities, the latter intended to improve the overall yield on the scheme.

The scheme offers the choice of monthly or quarterly dividend payouts to investors under the dividend plan and the prospect of accumulated income under the growth plan. While the minimum subscription amount for the dividend plan is pegged at Rs. 25,000, that for the growth plan is Rs. 5,000. The scheme proposes to levy an exit load of 0.5 per cent if investments are redeemed within six months.

Though the dividend distributed by the scheme would be tax-free for the investors, the fund would be liable to pay a dividend tax of 20 per cent on distributions from the scheme under the dividend plan, which would in any case cut into the returns generated on the portfolio. Though this could be partly compensated by the equity component in the scheme, this also adds an additional measure of risk and volatility to a scheme's NAV.

In respect of its existing debt scheme, Reliance Mutual Fund's track record has been moderate. Annualised returns on Reliance Income Fund since inception work out to around 12 per cent.

While this is a decent level of return per se, the scheme is not among the top-performing ones since its inception date. Schemes such as Sundaram Bond Saver and Jardine Fleming India Bond Fund, launched at about the same time as the Reliance Income Fund, have fared better in terms of returns.

The high minimum investment limit (of Rs. 25,000) under the dividend plan could also be viewed as a deterrent to the small investor. This appears to suggest that the fund is targeting high net worth investors under this scheme. Fund flows from these investors could turn out to be more volatile than those from smaller retail investors.

This could work to the detriment of a small investor who stays with the scheme. Individuals who wish to invest in the scheme despite the above factors, may be better off taking exposures under the growth plan (where returns are subject to capital gains tax) rather than the dividend plan where the tax on distribution would cut into returns.

Nature of scheme :Open end income

Objective :Regular Income

Liquidity :Repurchase

Mutual Fund :Reliance Capital Mutual Fund

Sponsor :Reliance Capital

Minimum subscription :Rs. 25,000 for dividend plan, Rs. 5,000 for growth plan

Offer opens :August 16

Offer closes :September 5