FUND FULCRUM

January 2017

(contd.)

Regulatory Rigmarole

AMFI has come up with a uniform set of guidelines for AMCs to implement government’s centralised KYC (CKYC) initiative which went live from July 15, 2016. From February 1, 2017, first time mutual fund investors will be required to fill the new CKYC form. The new CKYC forms capture additional details like mother’s name, maiden name, and FATCA details. AMCs will have to update this additional information on KRA as well as CKYC platform. SEBI had introduced KRAs in 2012 to have common KYC norms and eliminate duplication of KYC for all SEBI registered intermediaries. SEBI had given licenses to five KRAs - CDSL Ventures Ltd. (CVL), DotEx International Limited (DotEx), NSDL Database Management Ltd. (NDML), CAMS KYC Registration Agency (KRA), and Karvy Data Management Services. Investors who have completed CKYC can invest in mutual funds by quoting the 14-digit key identification number (KIN) allotted by Central KYC Records Registry (CKYCR) agency. To process the application, AMCs will have to download the KYC information of such investors from CKYCR system. Also, they will have to check whether the PAN of such investors is updated on CKYCR system. If not, AMCs have to collect a self-certified copy of investors PAN and upload it on CKYCR system. Further, AMFI has asked AMCs to modify their scheme application forms to capture the KIN. The industry body has urged AMCs to inform distributors and investors about complying with the new CKYC norms. A month back, all financial regulators - SEBI, PFRDA, RBI, and IRDAI had issued circulars instructing their respective regulated entities to upload KYC data of their customers on the CKYCR platform. Over a period of time, all investor data will be stored at a single place which can be accessed by all financial institutions to verify the KYC. All investors need to do is obtain a central KYC number from Central KYC Registry through the financial institutions and use it to invest in any financial product.  There will be no need to do multiple KYC.

BSE has extended the cut-off time for accepting transactions by 30 minutes in liquid, debt, and equity schemes from January 5, 2017. For liquid schemes, the cut-off time has been extended from 1 pm to 1.30 pm. Similarly, the new cut-off time for debt and equity schemes is 2.30 pm for transactions of Rs. 2 lakh and above. For transactions of below 2 lakh per application, the cut-off time is 3 pm. BSE has introduced a number of features in the recent past to make the platform seamless. For instance, the exchange has recently allowed mutual fund distributors to enroll themselves online. Currently over 2750 schemes of 39 AMCs are available on BSE StAR MF platform. BSE StAR MF has around 2,400 registered distributors. BSE StAR MF is a browser based automated online order collection system which can be accessed through web from anywhere. Distributors can initiate a number of transactions like invest, redeem, and start a SIP through this platform on behalf of their clients. It can be accessed via PDAs, tabs, laptops, or personal computer.

SEBI, in its board meeting held recently in Jaipur, has decided to allow celebrity endorsement of mutual funds at an industry level. Simply put, celebrities are not allowed to endorse a particular scheme or promote a fund house; instead, they can promote mutual funds at an industry level by promoting fundamental concepts such as benefits of long-term investments, starting a SIP to create wealth, and managing cash flows through liquid funds. Following SEBI’s diktat, fund houses are required to contribute one basis point of AUM to AMFI. Based on AUM of Rs.16.46 lakh crore as on December 2016, AMFI will have close Rs.165 crore at its discretion to spend on creating awareness about mutual funds this year. AMFI may use this corpus for celebrity endorsements. In addition, SEBI has decided to allow fund houses to advertise CAGR returns for the past 1 year, 3 years, 5 years, and since inception. Currently, AMCs can only publish scheme’s returns for twelve months period. Also, fund houses can advertise performance of other schemes managed by the fund manager. On web advertisements, AMCs can now provide back link to give a summarized information on returns.

Ministry of Finance has invited comments from stakeholders on the recommendations of Financial Sector Legislative Reforms Commission’s (FSLRC) suggestion to set up a Financial Redressal Agency (FRA). This agency will resolve consumer complaints against all financial services companies across regulators. The last date to submit feedback is January 2017. The committee headed by former Judge of the Supreme Court of India B. N. Srikrishna has also proposed a new financial consumer protection legislation to empower FRA to provide redress and to strengthen preventive regulatory framework on consumer protection. The government has already set up a task force in June 2015 to implement committee’s suggestions. The task force has observed that consumers are put under unnecessary stress as they are required to approach different ombudsman. This stress is further amplified due to varying levels of consumer protection across regulators. Further, there is a lack of powers to award compensation in some cases, pushing consumers to courts/consumer forums. The FRA is expected to enable retail consumers in remote locations to resolve their complaints without imposing significant costs on them. Consumers can approach Securities Appellate Tribunal (SAT) if they are not satisfied with FRA’s orders. The FRA is proposed to be set up with an initial budget of Rs. 100 crore. The operational costs of FRA will be funded by collecting fees from different regulators. The regulators will have to collect this fee from their respective regulated entities based on the size of the entities and number of complaints received by them. No fee will be charged to the consumer. The FRA will be operationalised in two phases. In the first phase, FRA will redress complaints handled by Insurance Regulatory and Development Authority of India (IRDAI), Insurance Ombudsman, and Pension Fund Regulatory and Development Authority (PFRDA). In the second phase, FRA will handle complaints against entities regulated by SEBI and retail complaints handled by Reserve Bank of India (RBI) and Banking Ombudsman. The FRA would be managed by a Board appointed by the financial regulators, in consultation with the government. It would also have an Independent Assessment Officer to consider complaints against the FRA’s redress function arising out of issues related to its standard of service. This was announced by Finance Minister Arun Jaitley in his 2015-16 budget speech.

Ahead of Budget 2017-18, the Association of Mutual Funds in India (AMFI) handed over its wish-list to Finance Minister Arun Jaitley.

Debt scheme under Sec 80 CCC

AMFI has proposed for debt-linked savings scheme to be included under the Sec 80 CCC limit. Currently, only equity-linked savings scheme — popularly known as ELSS — qualifies for tax benefits under Section 80 CCC of the Income Tax Act, up to an investment limit of Rs 1.5 lakh in a financial year. Besides, the mutual fund body also made a proposal to extend the tax benefits — currently available under Rajiv Gandhi Equity Savings Scheme (RGESS) — to all equity fund investors. In 2012, the UPA government had introduced RGESS only for first-time investors with annual income below Rs. 12 lakh a year, as a way to promote the “equity culture”.

Rs. 1.5 lakh tax benefit cap

AMFI has asked for raising the tax benefit limit to Rs. 1.5 lakh a year from Rs. 50,000 now.

Mutual Fund Long Term Retirement Plan

AMFI has also proposed a Mutual Fund Long Term Retirement Plan (MFLRP) — akin to the 401(k) plan in the US. Under this plan, investors would get to invest in the MFLRP — with portfolio options, such as conservative, moderate, and aggressive — based on the risk-taking appetite of the investor. The investor would get to redeem the full investment when he turns 60. There was a mention about it in Budget 2014. AMFI is bringing it to the notice of the Finance Ministry.

Capital gains tax plans

Lastly, AMFI has also pushed the case for extending Sec 54 EC benefit for mutual fund schemes with lock-in period of, say, three to five years. Under Sec 54 EC of the Income Tax Act, investors save on capital gains tax that need to be paid on sale/transfer of long-term capital assets, by investing in National Highways Authority of India (NHAI) bonds.

Robo advisory is the new buzzword in the financial advisory profession. According to an Infosys white paper ‘Increasing the efficiency and effectiveness of Financial Advice with Robo-Advisors’ this channel will grow at a healthy pace in the next four years. In fact, the company has found that globally, robo advisers had assets under advisory of US$19billion in 2014 which is set to increase to US$2.2 trillion by 2020. This translates to a CAGR of 120%. The company has attributed this growth to low costs of advisory fee. “Investors gain advice at much cheaper costs than the fees charged by human advisors. For instance, compared to an average 100 basis points charged by a human financial advisor, a robo-adviser cost just an average 30 basis points of AUM.” The white paper says that robo advisers have the potential to disrupt the existing wealth management setup, which is dominated by human-only distribution channels. The paper suggests that hybrid advisory model where human advisers and robo advisers work together is the way forward. “In 2014, robo-advisors were perceived as an outright threat to their human counterparts. However, 2015 has indicated that robo-and human advisers can co-exist. In fact, a hybrid route seems to be the way forward where a robo-advisor complements a human adviser in giving advice. This can provide numerous benefits: faster AUM growth, especially net inflows, newer opportunities in upcoming market segments comprising millennials, better empowerment of human financial advisors with time to think innovatively, and more opportunities to cross-sell high-margin advice.”

FUND FULCRUM

January 2017

The mutual fund industry has added more than Rs 3.5 lakh crore to its asset base in 2016, a record addition in the mutual fund industry's Assets Under Management (AUM). Fund houses are also working on their performance in 2017, while expecting investment from new investors to increase the growth of the sector. In addition, demonetisation of high-value currency notes could have a positive impact, with the industry betting high on conversion of cash assets into financial investments. The total AUM of all 43 active fund houses put together has increased by Rs 3.52 lakh crore, or over 26%, to a new record of Rs 16.93 lakh crore at the end of December 2016, which earlier stood at Rs 13.41 lakh crore in December 2015. November 2016 had recorded the previous all time high, when the asset base of the industry had increased to Rs 16.5 lakh crore. In 2015 and 2016 the equity markets have been more volatile with a lot more negative impact. The AUM increase translates into more investors staying invested, and new investors coming in.

Among the top five players, ICICI Prudential Mutual Fund led the pack with asset base of Rs 2,27,989 crore followed by HDFC Mutual Fund (Rs 2,21,825 crore), Reliance Mutual Fund (Rs 1,95,845 crore), Birla Sun Life Mutual Fund (Rs 1,80,808 crore), and SBI Mutual Fund (Rs 1,40,997 crore). Since April 2016, equity funds category has seen current financial year’s highest net inflow in the month of December 2016 i.e. Rs 14,029 crore which is Rs 1,324 crore higher than November 2016. Overall AUM of equity funds is now Rs 5.34 lakh crore, highest after October 2016 (Rs 5.45 lakh crore). Despite market being weak since November 2016, equity AUM has recovered due to fresh investments by the investors. As we still have three months to end the current financial year, we may close the financial year 2017 with highest ever equity and overall AUM in mutual funds. Investors' interest is continuously growing in equity investments. It is the right time to cash in on the opportunity, which has come after the demonetisation announcement, US elections, and US Central Bank action on their interest rates. SIPs, ELSS, and balanced funds have contributed sizably for overall equity inflows in the current year. In December 2016, balanced funds have seen an inflow of Rs 3,947 crore. It is Rs 315 crore higher than the previous month. Running SIP volume of approximately Rs 3,900 crore a month is a major support for fresh flows in the markets. On an annualized basis, it works out to more than Rs 46,000 crore and is increasing. On the other side, ELSS category has seen an inflow of Rs 907 crore in December 2016 and it is expected that it will bring higher inflows in the months between January to March 2017 because investors will be looking forward to tax saving options. ELSS, with attractive market valuations, is making a strong case for fresh investments. Out of the total investor accounts with 43 active fund houses, the number of folios rose to a record 52,820,155 at the end of December 2016, from 45,853,274 at December-end 2014, a gain of 69.67 lakh, according to SEBI. The momentum of retail participation from 2015 continued, and showed a remarkable recovery in market volatility last year too. Equity schemes have also contributed to the huge inflows. There was seen a infusion of Rs 2.86 lakh crore in mutual funds, while equity and ELSS alone attracted an impressive inflow of around Rs 51,000 crore.

AUM of the Indian mutual fund industry touched an all-time high of Rs 16.46 lakh crore in Dec 2016, according to data from the Association of Mutual Funds in India (AMFI). This translates into a compounded annualised growth rate of 18% from Rs 3.26 lakh crore AUM in Mar 2007. The robust performance of the mutual fund industry comes on the back of growing investor awareness and increased investments in Systematic Investment Plans (SIPs). Post demonetisation, interest rates have started declining and could have a positive bearing on the performance of debt-oriented mutual funds. Industry AUM had crossed Rs 10 lakh crore in May 2014, and it may reach the important milestone of Rs 20 lakh crore in the calendar year 2017, if market conditions remain favourable.

Assets under the liquid fund category increased 9.9% in Dec 2016 from the prior month. The short-term category witnessed net inflows in Dec 2016, while income and gilt categories saw net outflows. Liquid funds could be a game-changer if the instant liquidity feature initiated by a few fund houses in select debt schemes gains traction. Under the facility, redeemed units of a liquid fund get instantly credited to the bank account of the investor. Liquid funds could then give tough competition to savings accounts. Assets under gilt and income categories fell 8.8% and 4.6%, respectively. Gilt funds proved to be the biggest beneficiary of demonetisation as high liquidity in the banking system drove bond yields down. A falling interest rate regime suits long-term debt-oriented mutual fund categories such as gilt funds as bond prices are inversely proportional to interest rates and investors can take this as an opportunity to book profits.

Mutual funds saw net inflow of Rs 10,923 crore in Dec 2016, of which Rs 10,103 crore was in equity funds. This is the ninth straight month to witness positive inflows in equity schemes. Steady inflows from SIPs and increasing investor awareness have contributed to the category’s growth. In the current financial year, total mobilisation in equity schemes has been nearly Rs 51,000 crore. It is expected that the momentum will continue in the last quarter of FY17 as investors may opt for tax-saving options like Equity Linked Saving Schemes (ELSS). As per AMFI data, total amount collected through SIP in Dec 2016 was Rs 3,973 crore. In FY17, the mutual fund industry on an average has added about 6.19 lakh SIP accounts every month. The average ticket size has been around Rs 3,200 per SIP account.

In Dec 2016, more than seven lakh new folios were added. Total folio count at the end of the month was 5.2 crore, which is 1.5% higher than Nov 2016 and 10.8% than Mar 2016. During the month, one lakh new folios were added to the ELSS category, while equity, balanced, and ETF categories together witnessed addition of over five lakh folios. Folio count grew across all debt categories, and in the liquid category it doubled from the Mar 2016 level. However, de-growth was seen in gold ETFs.

AUM from B15 cities increased 32.4% against industry growth of 26% in the 12-month period ended Nov 2016, driven by investor-friendly initiatives by regulators and investor-education campaigns of AMCs. The proportion of equity to non-equity schemes is more evenly distributed in B15 cities compared with T15 cities. In T15 cities, it is skewed towards non-equity schemes due to the presence of institutional investors. In Nov 2016, equity-oriented schemes accounted for 27% of T15 assets, whereas it was 49% for B15, according to AMFI data.

Piquant Parade

BNP Paribas Mutual Fund has been the 26^th fund house to join the mutual fund utility. With the addition of BNP Paribas and the acquisition of JP Morgan by Edelweiss, the AUM of the funds participating in MF Utility is close to 94% of the industry. The distributors of the company will have more convenience like paperless transactions called TransactEezz; ability to provide login facility to their customers through Distributor Initiated Login (DIL); and various other conveniences that MFU is bringing to the table. This has been guaranteed by the various international awards MFU has won in London and Kuala Lumpur. MF Utility has launched many features for distributors and investors such as e-CAN (Common Account Number) facility, which allows distributors and investors to open a CAN online for individual investors. BNP Paribas Mutual Fund recently was awarded the best industry infrastructure initiative award in the financial services category, at The Banking Technology Awards event, held in London.

By buying 2 lakh shares from the open market, Birla Sun Life Asset Management Company has raised its stake to 9.01% in ICRA, which is a rating company. Birla Sun Life Asset Management would pay Rs 81.3 crore, at closing market price. The mutual fund company had 7% stake in the rating agency, before buying 2 lakh shares through an open market transaction. Birla Sun Life Asset Management Company, the investment manager of Birla Sun Life Mutual Fund, is a joint venture between the Aditya Birla Group and the Sun Life Financial Inc., of Canada. The joint venture brings together Aditya Birla Group's experience in the Indian market and Sun Life's global presence.

To be continued…..

NFO NEST

January 2017

NFOs of various hues adorn the January 2017 NFONEST.

IDBI Midcap Fund

Opens: January 5, 2017

Closes: January 19, 2017

IDBI Mutual Fund has launched a new fund named as IDBI Midcap Fund, an open-ended equity fund. The investment objective of the fund is to provide investors with the opportunities for long-term capital appreciation by investing predominantly in equity and equity related instruments of midcap companies. The fund shall invest 65%-100% of assets in equity and equity related instruments of midcap companies with high risk profile and invest upto 35% in debt and money market instruments with low to medium risk profile. Benchmark Index for the fund is Nifty Free Float Midcap 100. The fund manager is V.Balasubramanian.

UTI Dual Advantage Fixed Term Fund – Series IV - II

Opens: January 9, 2017

Closes: January 23, 2017

UTI Mutual Fund has launched a new fund named as UTI Dual Advantage Fixed Term Fund Series IV - II (1278 Days), a close ended hybrid fund. The duration of the fund is 1278 days from the date of allotment. The investment objective of the fund is to generate income and reduce interest rate volatility by investing in fixed income securities that are maturing on or before the date of maturity of the fund and generate capital appreciation by investing in equity and equity related instruments. The fund would invest 65%-95% of assets in debt instruments with low to medium risk profile, invest upto 30% of assets in money market instrument with low risk profile and invest 5%-35% of assets in equity and equity related instruments with medium to high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Fund Index. The fund managers are Sunil Patil (debt portfolio) and V. Srivasta (equity portfolio).

ICICI Prudential Value Fund – Series 11

Opens: January 10, 2017

Closes: January 24, 2017

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Value Fund - Series 11, a close ended equity fund. The fund will have a tenure of 1100 days from the date of allotment of units. The investment objective of the fund is to provide capital appreciation by investing in a well diversified portfolio of stocks through fundamental analysis. The fund would invest 80% to 100% of assets in equity and equity related instruments with medium to high risk profile and invest upto 20% in debt, money market instruments and cash with low to medium risk profile. Investment in derivatives can be upto 50% of the net assets of the fund. Benchmark Index for the fund is S&P BSE 500 Index. The fund managers are Manish Gunwani, Rajat Chandak, and Ihab Dalwai (for investments in ADR / GDR and other foreign securities).

Mahindra Dhan Sanchay Yojana

Opens: January 10, 2017

Closes: January 24, 2017

Mahindra Mutual Fund has launched a new fund named as Mahindra Mutual Fund Dhan Sanchay Yojana, an open ended equity fund. The investment objective of the fund is to generate long-term capital appreciation and also income through investments in equity and equity related instruments, arbitrage opportunities and investments in debt and money market instruments. The fund would allocate 65% to 85% of assets in equity and equity related securities of which: invest 35%-50% in equity and equity related securities (unhedged) with high risk profile and invest 15%-35% in equities, equity related securities and derivatives including index futures, stock futures, index options and stock options etc. as part of hedged/arbitrage exposure with medium to high risk profile and invest 15%-35% in debt and money market securities with low to medium risk profile. Benchmark Index for the fund is 45% Nifty Index + 55% Crisil Composite Bond Fund Index. The fund managers are Rahul Pai and Ratish Varier.

UTI Long term Advantage Fund – Series V

Opens: December 22, 2016

Closes: March 29, 2017

UTI Mutual Fund has launched a new fund named as UTI Long Term Advantage Fund – Series V, a 10 year close-ended equity linked savings scheme. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity related instruments of companies along with income tax benefit. The fund will allocate 80%-100% of assets in equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies with high risk profile and invest upto 20% of assets in money market instruments with low to medium risk profile. The fund's performance will be benchmarked against S&P BSE 100 Index. The fund will be managed by Lalit Nambiar.

SBI Long term Advantage Fund – Series IV

Opens: December 30, 2016

Closes: March 29, 2017

SBI Mutual Fund has launched the SBI Long Term Advantage Fund-Series IV, a 10 year close ended ELSS scheme. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund’s performance will be benchmarked against S&P BSE 500 Index and its fund manager is R. Srinivasan.

IDFC Dual Advantage Fund – Series 1 & 2, SBI Equity Opportunities Fund – Series VII to IX, Union Focused Largecap Fund, Union Capital Protection Oriented Fund – Series 7, ICICI Prudential Value Fund – Series 13 to 16, DSP Blackrock Nifty 50 ETF, and Sundaram Nifty 100 Equal Weight Fund are expected to be launched in the coming months. 

GEMGAZE

January 2017 

Balanced funds are excellent investment options for investors with moderate risk tolerance, since they give very good risk adjusted returns. It is very surprising why balanced funds are not nearly as popular as diversified equity funds, despite being around in India for nearly two decades. Balanced funds are essentially hybrid funds with both debt and equity in its portfolio mix, to balance the portfolio risk. These portfolios typically hold up to 70% of their portfolio assets in equities and the balance in fixed income. On a risk adjusted basis, balanced funds have delivered excellent returns compared to other equity fund categories.

All the GEMs from the 2016 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2017 GEMGAZE too. 

HDFC Prudence Fund Gem

HDFC Prudence Fund is the largest fund in the category with assets amounting to Rs 14,636 crore. HDFC Prudence, with its long-standing track record of delivering 13.77% compounded annually over the last 10 years, towers over the category average of 10.17% annually over the same period. Over a three- and five-year period horizon, the fund returned an annualised 19.58% and 17.12%, respectively as against the category average returns of 15.52% and 14.68%, respectively, over the same period. The fund earned a return of 12.97% in the past one year as against the category average of 8.56%. HDFC Prudence Fund has a diversified quality portfolio with a blend of growth and value and maintains over 70% (74.63% at present) equity allocation before rebalancing. The allocation to a single stock has been capped at around 7%, with the highest currently allocated to State Bank of India. There are 93 stocks in the portfolio and the top three sectors are finance, energy, and technology, which constitute 37.10% of the portfolio. The portfolio turnover is 71% and it has an expense ratio of 2.27%. The fund is benchmarked against CRISIL Balanced Fund Aggressive. The fund is managed by Prashant Jain, an outstanding manager, who is at the helm in one of the best AMCs, which follows a robust process.

ICICI Prudential Balanced Fund Gem

ICICI Prudential Balanced Fund has earned a return of 16.87% over the past one year as against the category average of 8.56%. The three-year and five-year returns are also more than the category average of 15.52% and 14.68%, respectively at 19.9% and 19.42%, respectively. The fund has 71.24% of its portfolio invested in equity comprising 49 stocks. This Rs 5098 crore fund has 35.92% of the portfolio in the top three sectors, finance, energy, and technology. The fund predominantly parks its money in large-caps. But the fund also times its mid-cap investments well, to boost its returns. The expense ratio of the fund is 2.32% while the portfolio turnover ratio is 282%. The fund is benchmarked against CRISIL Balanced Fund Aggressive. Sankaran Naren, the veteran fund manager, manages this fund along with Manish Banthia and Yogesh Bhatt.

Tata Balanced Fund   Gem

The tightrope walk between safety and returns that a balanced fund has to perform is not straightforward, but Tata Balanced has consistently done this better than most of its peers. This fund has handsomely outperformed the benchmark as well as the category over the last ten years. Ten year returns have been 13.6%. This compares very well with the category average of 10.17%. The one-year return of this Rs 6414 crore fund is 5.9% as against the category average of 8.56%. Returns of 18.99% and 18.31% respectively, as against the category average of 15.52% and 14.68% during a three- and five-year period, reflects the fund's ability in stock selection. The fund has not only delivered higher returns during market rallies but also capped losses well during market downturns. During the bear markets of 2011 and 2015, for instance, the fund proved its mettle by outperforming its peers. In the bull phases too (2012 to 2014), it outpaced its peers by a margin of five percentage points. A relatively higher exposure to mid-cap stocks in its equity portfolio, spicing up returns, has helped the fund top the charts. The fund has maintained a well-balanced portfolio comprising equity and debt with a mix of 73:27 respectively (on an average over the last three years). On the equity side, the fund favours a growth-oriented strategy, following a bottom-up approach while cherry-picking stocks with good earnings growth and strong balance sheets. This has aided its steady performance over the long term. However, this strategy did not play out well in the recent rally, which was led by stocks in sectors such as banks, commodities, etc. The fund held a relatively lower share in these stocks compared to its peers. This led to the fund underperforming its peers during the short-lived rally of 2016. However, the long-term track record has been commendable, with the fund outperforming its category in nine out of 10 years. Finance, construction, and energy are the top three sectors. In terms of portfolio construction, equity comprises 72.09% of the portfolio mix, while fixed income securities comprise the rest. The fund has 74 stocks in the portfolio. The fund is benchmarked against CRISIL Balanced Fund Aggressive. The portfolio turnover ratio of the fund is 237% and the expense ratio is 2.3%. The fund is managed by Akhil Mittal and Pradeep Gokhale.

Reliance Regular Savings Equity Fund   Gem

Reliance Regular Savings Equity Fund is an equity-oriented balanced fund with 68.5% in equity. The one-year return of this Rs 3849 crore fund is 6.75% as against the category average of 8.56%. Returns of 18.11% and 17.49% respectively, as against the category average of 15.52% and 14.68% during a three- and five-year period, reflects the fund's ability in stock selection. 42.98% of the portfolio is in the top three sectors, finance, automobile, and technology. The fund has a very compact portfolio of 53 stocks. The fund is benchmarked against CRISIL Balanced Fund Aggressive. The portfolio turnover ratio of the fund is 156% and the expense ratio is 2.03%. The fund is managed by Mr. Amit Tripathi and Mr Sanjay Parekh.

Canara Robeco Balanced Fund Gem

Canara Robeco Balanced Fund is the oldest balanced fund that has exhibited smooth sailing across market cycles. The one-year return of the fund is 5.92% as against the category average of 8.56%. The fund’s three-year and five-year returns of 17.84% and 16.24% respectively are higher than the category average of 15.52% and 14.68% respectively. Canara Robeco Balanced Fund puts in around 67.73% of its portfolio into equities, with 61 stocks in the portfolio. 33.19% of the portfolio is in the top three sectors, concentrated in finance, automobile, and energy sectors. The good performance of Canara Robeco Balanced Fund across market cycles is attributable to its bias towards safety and stability. This is reflected in the significant proportion of large-cap stocks in its portfolio. The fund is benchmarked against CRISIL Balanced Fund Aggressive. The expense ratio of this Rs 768 crore fund is 2.57% with a portfolio turnover ratio of 319%. The fund is managed by Mr. Avnish Jain, Mr. Ravi Gopalakrishnan, and Mr Shridatta Bhandwaldar. 

FUND FLAVOUR

January 2017

Balanced Funds strive towards perfection

The perpetual question that investors are faced with is: Debt or Equities. As an investor, should you opt for volatility and get high returns of equities? Or should you seek safety in debt while gathering moderate returns? While it is agreed both have their pros and cons, making this choice is difficult because we are always trying to get the best of both the worlds. What if there was a way to invest in both - equities and debts and generate high returns with moderate risk? That sounds like perfection and that is what balanced funds strive to be.

Raison d’etre

There is no shortage of self-proclaimed investing experts trying to outperform the market with equity mutual funds. Debt mutual funds, on the other hand, occupy a slightly more humble, yet potentially rewarding, spot on the spectrum. Your need for each asset class, as an investor, depends on your age and goals, rather than market conditions.

That is where balanced funds come in.

Balanced funds combine different asset classes, such as equities and debt, to help investors leverage the high returns from equities over time while also benefitting from the steadier, but lower returns from debt.

It all comes down to that age-old maxim, “no risk, no reward.”

Equities are high-risk investments due to their exposure to corporate performance, so the possibility of higher returns is the upside you get for taking a bet on companies. There is also a chance one bad day on the stock market could wipe out your entire investment. It could take months or years to recoup that money.

The downside of debt funds is that the returns are lower because they invest in fixed income bearing instruments like corporate bonds, debentures, government securities, commercial paper, and other money market instruments. But the chance of default will be rare if the issuer to whom you are technically lending the money (the government or a corporation) has a high credit rating. However, the relationship between bonds and interest rates may also affect returns positively or negatively.

So, asset management companies designed balanced funds to provide investors with a moderate-risk product. Left on their own, equity and debt will bring you either too much volatility or too little returns. Balanced funds allow for diversification so you can benefit from the best of both worlds without putting all your assets on the line.

Because balanced funds comprise different equity and debt components, they can be classified as “aggressive” or “conservative” funds, with varying degrees of capital protection, growth, and income.

Equity-oriented balanced funds (minimum 65% in equity) earn returns that are generally lower than a purely equity-focused fund, but again, the risk is also lower. The equity component of balanced funds can veer toward higher-risk sector-specific or small-cap companies, or can comprise safer investments such as blue-chip stocks. Debt-oriented balanced funds contain more debt (70-85%) than equity. The risk level would be higher than that of a pure debt fund, but lower than an equity-oriented balanced fund because of a smaller equity component. Debt funds known as monthly income plans also allow conservative investors to earn a regular dividend.

If the value of equities in a balanced fund drops or rises due to market conditions, the manager (a balanced fund may have more than one person supervising it) has to adjust the weightage by buying or selling more shares proportionately to maintain the ratio of equities to debt.

It is important to remember that, while equity and debt markets tend to be inversely related, they have at times gone either way at once. And while debt is generally a safer investment than equities, interest rate movement and the risk of default will always, in theory, be a risk.

Ultimately, the decision to invest in a balanced fund depends on your risk tolerance, time-frame and objectives. Remember that balanced funds are not the only way to mix up your investment strategy – you can also diversify by allocating your resources into separate pure income funds or pure equity funds.

Conflict and confusion

The first conflict that you may have in mind is instead of investing in one scheme and putting all eggs in one basket, it is probably better to invest individually in equity schemes and debt schemes. One of the myths concerning balanced funds is regarding the usage of the word ‘balanced’ and the confusion it tends to create. Investors are often under the illusion that the word balance connotes a 50:50 investment in debt and equities. This could be far from the truth. The word ‘balance’ is used to denote that equities pose a certain risk to investments due to volatility of stock markets. Hence, to balance out the risk a certain percentage of debt investments are made.

Advantage balanced funds

Let us have a look at the factors that make balanced funds the best bet.

Reduces the need to diversify

Diversification is one aspect you have probably heard experts talk about when they discuss ‘successful ways of building a portfolio’. You are constantly thinking of ways to rebalance and diversify and moving around your funds and not allowing your investments to settle at one place. Investing in balanced funds reduces the need to constantly move around funds as it auto rebalances the allocation.

Asset Allocation has been done

Getting the asset allocation right is the biggest challenge for any investor. People spend years in the industry and still fail to be sure if the asset allocation will yield the right results as it has often been on a slippery ground. In balanced funds, the asset allocation is carried out depending on the fund’s inclination to debts or equities. One of the major factors taken into consideration during asset allocation is the current age of the investor. The thumb rule states that “100 minus the age of the investor” will determine the percentage in equities.

In case of a balanced fund, the investors just have to make a choice between equity-oriented balanced funds and debt-oriented balanced funds. So, if an investor is 40 years old, then it is advisable to invest 60% (100-40=60) in equities and 40% in debts or instead invest in equity-oriented balanced funds. In another case, if an investor is 60 years old, then it is advisable to invest 40% (60-100=40) in equities and 60% in debts or instead invest in debt-oriented balanced funds. The existence of balanced funds does make the process of asset allocation fairly simple for investors.

While balanced funds rebalance the risk, the return difference between pure diversified equity mutual funds and equity-oriented balanced funds is very less. Investors can still make good returns from equity-oriented balanced funds by not taking as much risk as they would have taken in case of diversified equity funds.

The tax benefit angle

Balanced funds, from a tax perspective are treated like equity funds, because these funds have at least 65% of their portfolio invested in equities. Like equity funds, capital gains from investment in balanced funds held for over 12 months is tax free. Capital gains from investment in debt funds held for a period of less than 36 months is added to the income of the investor and taxed as per the investor’s tax rate. Capital gains from investment in debt funds held for over 36 months is taxed at 20% with indexation benefits. Therefore, purely from a capital gains tax standpoint, investment in balanced fund is more efficient than investment in a combination of equity and debt fund.

Promises returns and safety

It would be an ideal scenario if an investor could maximise returns by undertaking zero risk. While ideal scenario is hardly achievable in reality, investing in balanced funds brings us closer to that. The balanced fund balances out the risk imposed by equities by investing in debt, thus making this a moderately safe investment. Investors with varying risk appetites can invest in these funds without the fear of making loss.

It is often believed that one should not invest in funds based on future predicted performances. It is also said that past performances or stellar performances on paper are no guarantee for the future return. However, advisors and experts often rely on the stability of the past performance of the funds. The sudden rise or drop in performances is never appreciated as it points towards volatility and the investors must try to avoid it. In the last ten years the funds have delivered decent returns and in some cases stellar returns. None of the funds have depreciated despite dwindling markets in most parts of the last decade. Equity-oriented balanced funds have given a stellar performance and generated cumulative returns of over 270%.

The flip side

Asset allocation is often considered to be a personalised task where investors and advisors discuss and design a portfolio which is especially suited to the investor’s need. While balanced funds have asset allocation inbuilt in the funds they are not customised to fit into the individual investor’s needs. The changes in asset allocation take place only when there are drastic changes in the market. Otherwise, the asset allocation remains fixed despite the changes in investor’s need. Hence, these funds are not tailor-made. They cater to a larger objective and not to personalised objectives or needs. So, an investor has to make an investment decision to design a portfolio with asset allocation which will generate the stellar returns as the funds or invest in balanced funds.

The rising popularity

Though balanced mutual funds have been around for quite some time investors have recently warmed up to them. Data from ValueResearchOnline show that investors pumped in Rs 28,484 crore into balanced funds in financial year 2016, compared to Rs. 15, 417 crore in financial year 2015, a whopping 84% increase. According to a recent report, balanced funds raked in Rs 3275 crore in October 2016, higher than the Rs 3,248 crore that went to equity funds. With rise in the popularity of balanced funds, the fund houses have seen growing competition. Balanced mutual funds have witnessed inflows to the tune of Rs 2,079 crore in the month of July 2016, alone. Thus, with rising inflows and improved performances of markets, balanced mutual funds are increasingly offering dividend payouts. New investors often do not realise that dividends are paid out from capital investments and not over and above the invested amount. For example, if you hold 100 units of a mutual fund and it offers a dividend of Rs 5 per unit, you may receive Rs. 500 as dividend payout every month but the NAV of your investment is adjusted proportionally.

Checklist prior to investment

Check on the equity and debt investment component of the balanced fund before making an investment call. An equity-oriented fund would have at least 65% exposure to equity.
Compare the expense ratio of the funds, which amounts to administrative, management, and advertisement costs. Opt for the one which has a low expense ratio and a good performance record.

Check on the risk level and fund ratings along with the performance and experience of the fund manager. Since balanced mutual funds have a large exposure to the equity market, you do not want to leave your funds in an amateur’s hands.

Balanced funds are excellent option for investing for the long term. Balanced funds make a good investment choice even in a falling market as the fixed returns on debt keep the returns steady. Therefore, investors with the help of the debt component often get ahead of falling markets. The investors again can take advantage of rising markets due to the exposure in equities. Hence, investors can gain much more than they have to lose by investing in balanced funds. In fact, balanced funds should be the core investment element in a mutual fund portfolio of first time investors. With automatic rebalancing of your portfolio and tax efficient returns, equity-oriented balanced fund could be one of your best investing choices if you are able to take moderate risk. However, if you are a conservative investor then you can consider debt-oriented balanced funds like Monthly Income Plans (MIP), etc. So, instead of pouring hours over different funds and schemes and figuring the right asset allocation and the ways to rebalance go for the balanced fund option and see your investments grow steadily.