Kothari Pioneer Monthly Income Plan: Subscribe

Recommendation: Subscribe

Aarati Krishnan

THE KOTHARI Pioneer Monthly Income Plan is structured on much the same lines as other monthly income plans launched in the recent past.

The scheme will invest mostly in debt with an equity component of up to 20 per cent, which could boost returns.

The scheme offers a dividend plan (with payout and reinvestment options) and a growth plan. The minimum subscription amount is Rs 10,000. However, investors opting for systematic withdrawal (available only under the Growth Plan), have to invest a minimum of Rs 25,000. The scheme proposes to levy a one per cent exit load if investments are redeemed within six months, and 0.5 per cent if investments are redeemed between six months and a year.

The distribution tax of 22 per cent (under existing tax laws) is the key deterrent to a small investor investing in the dividend plan of a mutual fund's monthly income scheme. Though the dividend paid out by the fund is tax-free for the unitholder, since the tax comes out of the fund's net assets, the incidence of tax is likely to cut into the fund's effective returns. This makes the fund unattractive to all investors, but those in the 30 per cent tax bracket.

Investors can normally avoid the higher tax incidence by opting to redeem a specific number of units at regular intervals (known as systematic withdrawal), instead of opting for a dividend payout from the fund. But in this case, KMIP has set a higher minimum subscription limit of Rs 25,000 for investors opting for systematic withdrawal. Thus, this option seems unsuitable for small investors.

Prospective investors need to weigh if the lower returns under the Dividend Plan are compensated by the benefits of perpetual liquidity and convenience offered by an open-end mutual fund such as this one. Though the small equity component in the KMIP has the potential to pep up the fund's returns, it also adds to the fund's risk profile.

In this context, Kothari Pioneer Mutual Fund's track record in managing debt and equity funds is quite reasonable. While its open-end debt scheme, the Income Builder Account, has been a moderate performer, some of the close-end debt funds from Kothari Pioneer figure are among the top performers within the debt funds category. Among equity funds, the fund has a fairly good track record of consistent performance across its schemes. The fund manager proposes to counter the current volatility in the debt markets by initially focussing on debt instruments of shorter duration and then moving on to intermediate term debt.

Nature of fund :Open end

Objective :Regular income

Minimum subscription :Rs 10,000

Issue opens/closes :September 11/September 25

Sponsor :Pioneer Investmt Mgmt US/Investment Trust of India

Fund manager :Suresh C. Soni