A report from CRISIL and AMFI mentions that Monthly Income Plans (MIPs) of mutual funds are better than bank fixed deposits. Is the conclusion based on a flawed performance index?

Ratings agency CRISIL and the Association Mutual Funds in India (AMFI) have jointly launched a family of Mutual Fund Performance Indices. A report describing the various indices titled “CRISIL AMFI Mutual Fund Performance Insights” describes the performance of different category of mutual funds. The report also says that Monthly Income Plans are an alternative to long-term fixed deposits. At an aggregate level, “MIP funds (measured by the CRISIL-AMFI MIP Fund Performance Index) have outperformed the three-year FD index over one, five, seven and 10 year periods”, mentions the report.
In an earlier article we have mentioned that the indices maybe flawed (Read: Is the CRISIL-AMFI mutual fund performance index grossly flawed?). Here again, our analysis has shown that if a saver had put his money in an average performing MIP five years back his returns would have been lower than that of a FD. If he had invested in any of the bottom-rung performers his return would have been much lower than even the post-tax returns of a FD.
 

Moneylife has analysed MIPs in the past and mentioned that they are avoidable as they have delivered inconsistent performance and bank fixed deposits would provide the same or better returns with a much lower risk. (Read: Bank fixed deposits vs MIPs: Neither monthly, nor income) Over the one year period, the CRISIL-AMFI MIP Fund Performance Index has delivered a return of 8.48%. In our recent analysis, out of the 48 schemes that have been in existence over the past one year, just 22 schemes have delivered a return over 8.48%. The average returns of 48 schemes was 8.33%, much lower than that of the benchmark index which returned 9.06% and the three-year FD index which returned 8.40%. Similarly for the five-year period the CRISIL-AMFI MIP index seems to have delivered a return of 8.79%, whereas, our analysis has shown that the 33 schemes which have been in existence for five years have delivered an average return of just 7.32%. As many as 26 schemes failed to deliver a return above 8.79%, and 16 schemes underperformed the three-year FD index.
 

In a reply to our email on the methodology, Mukesh Agarwal, President, CRISIL Research, mentioned that schemes that meet a minimum Assets under management (AUM) and history criteria are considered. They also take asset-weighted returns of the schemes and not average returns as he says asset weighted return is the most appropriate and well accepted approach for calculating performance of the total assets managed by the mutual fund industry.
 

As per the methodology only those MIPs which have a minimum corpus of Rs25 crore and have a track record of three or more years are considered. And asset-weighted returns are calculated. Why is this method flawed? The same reason why the movement of the Sensex is skewed in favour of a few major companies (Read: Why Sensex is not the barometer of the Indian economy). Out of the 31 schemes that fit the criteria of the CRISIL-AMFI MIP Fund Performance Index, the top two schemes as per AUM have a weightage of 57%. The top 10 schemes with the highest corpus contribute over 80% to the total AUM of the selected sample. The bottom half of the schemes have a total weightage of just 12%. Does this truly represent the entire sample of schemes? The top few schemes maybe performing better than bank FDs, but does the lay investor know this? As we mentioned in the beginning, if he invested in any of the bottom performers his return would have been much lower than even the post-tax returns of a FD. The only one benefitting from such flawed metrics here seems to be the fund industry which is now desperate for some intellectual arguments to be relevant.