FUND FULCRUM

January 2019

Mutual funds have added a whopping Rs 3 lakh crore to their asset base in 2018 and the uptrend may continue in 2019, helped by consistent rise in the SIP flows and a strong participation of retail investors despite volatile markets. The asset under management (AUM) of the industry rose by 13% to Rs 24 lakh crore in 2018 by November-end itself, up from Rs 21.26 lakh crore at the end of December 2017, according to data available with AMFI. The investor count is also estimated to have grown by over 1.3 crore during 2018. The pace of growth, however, declined for the asset size in 2018 as compared to 2017. The industry had seen a surge of 32% in the AUM or an addition of over Rs 5.4 lakh crore in 2017. The AUM in December 2018 fell 4.9% to Rs 22.86 lakh crore over November 2018. The IL&FS default and the consequent blow to the NBFC sector because of the credit crunch exposed mutual funds to several crores worth of ill-liquid debt funds. This coupled with volatile markets could be some of the reasons for a slower growth in assets base in 2018. Going into 2019, the fund houses expect the industry to witness robust growth as the sector is yet to tap its full potential. Besides, several measures taken by the regulator SEBI will help in increasing the penetration of mutual funds. The factors that will drive the growth in 2019 include the untapped potential, rising investor awareness about mutual funds as an investment alternative and a spirited promotion campaign by AMFI.

Equity fund folio addition has boosted the domestic mutual fund industry, helping it register over 5.7 lakh more investor accounts in December 2018, according to the data of the Securities and Exchange Board of India (SEBI). Total investor accounts stand at 8.03 crore in December 2018. In comparison, the 43-player industry had added 7.05 lakh folios in November 2018 and 11.5 lakh folios in October 2018. Equity folios halved from 10.6 lakh folios in October 2018 to 4.91 lakh folios in December 2018. Equity funds include pure equity, ELSS and balanced funds. Fund managers attributed the addition in equity fund folios to the matured behaviour of retail investors who were seeing the market fall as an opportunity to invest their surplus money. Folios in equity ETF rose 3.75%, gilt funds (3.41%) and liquid funds (2.58%) grew at the fastest pace during the review period. Interestingly, income funds reported a marginal increase in their folio counts, against the decline observed in the last few months. Income funds reported net outflow during the month, with macroeconomic variables turning favourable. With no further expectation of a rate hike in the near term, the increase in investor folios suggests they may be slowly returning to this category.

HDFC Mutual Fund reclaimed its position as the country’s top asset manager by assets after a gap of nearly three years. In the last quarter ending September 2018, HDFC Mutual Fund had stood at the second spot behind ICICI Mutual Fund with quarterly average assets of Rs. 3.06 lakh crore. While ICICI AMC saw net outflows to the tune of Rs. 2,522 crore during the quarter ending December 2018, HDFC Mutual Fund recorded inflows of Rs. 28,604 crore propelling it to the top position. Most fund houses saw a decline in their AUM in the quarter ending December 2018. Overall, the industry AUM fell by 3% last quarter. The industry AUM had touched an all-time high of Rs. 25.20 lakh crore in August 2018. However, post September 2018, macroeconomic concerns and NBFC credit event led to outflows from debt funds. Subsequently, mutual fund AUM for the quarter ending in December 2018 fell from the September 2018 quarter level. Among the top 10 mutual funds, only HDFC Mutual Fund, SBI and Kotak Mahindra Mutual Fund recorded an increase in their assets while the remaining fund houses saw a decline in their AUM. On gross basis, HDFC Mutual Fund saw the highest increase in its AUM (Rs. 28,604 crore) while DSP Mutual Fund saw the highest fall (Rs. 16,212 crore). In percentage terms, Shriram Mutual Fund (87%), PPFAS Mutual Fund (14%) and HDFC Mutual Fund (9%) were the fastest growing fund houses during the quarter while DHFL Pramerica Mutual Fund (53%), Indiabulls Mutual Fund (53%) and LIC Mutual Fund (35%) saw the sharpest decline in their assets.

The top five fund houses account for 71% of the industry’s profit, according to HD ‘Asset Management Companies’ report. PAT (profit after tax) denotes the fund house profit. Overall, the mutual fund industry has witnessed a 26% (CAGR) growth in its assets from Rs. 8.25 lakh crore in FY 14 to Rs.24.03 lakh crore in November 2018.  In line with the growth in AUM, the PAT of the industry grew 28% during FY 14 to FY 18. A key reason for the growth in profitability is the rising share of equity assets in the industry. The share of equity vis-à-vis the total industry AUM has grown continuously since 2014. Over the last four years, the equity AUM grew at 36% CAGR to reach Rs.9.20 lakh crore. As of November 2018, 40% of the industry assets were in equities compared to 25% in FY2014. According to the report, fund houses having higher equity assets tend to deliver higher returns on assets represented by PAT as a percentage of AUM.

Over the last two years, SIP has been a driver of steady inflows in the industry. In fact, the latest AMFI data shows the industry’s SIP collection for the FY year 2018-19 (Rs. 68,479 crore) has already surpassed the total collection in FY17-18 (Rs. 67,190 crore). Assuming the monthly SIP inflows continue at the current level (Rs. 8,022 crore) for the next three months, the industry will receive Rs. 92,545 crore as SIP inflows in FY 18-19. This will be a 38% increase over the previous year’s collection. SIP flows grew by 53% in FY17-18. While we may see some uptick in SIP inflows near the end of the year, the momentum in SIP seems to have slowed. As per recent AMFI data, on a net basis SIP flows grew by Rs. 37 crore to reach an all-time high of Rs. 8,022 crore last month. The industry also added 2 lakh SIP accounts on a net basis in December taking the total to 2.54 crore SIP folios. On an average, the industry has added 9.46 lakh SIP accounts each month in FY 18-19.

Piquant Parade

IDFC has shelved plans to sell the asset management company. After spending months searching for a buyer, IDFC Financial Holding Company - a part of IDFC - has decided to retain its fund management business. The board of the group company felt that it makes sense to hold the fund house and grow it over time rather than sell it. IDFC has now decided to focus on making its underlying businesses more retail-focused. The fund house failed to elicit the kind of valuation it sought. While the fund house expected around Rs 5,000 crore, it got bids in the range of Rs 3,500 – 4,000 crore. Avendus Capital, Reliance Nippon Life Asset Management, IndusInd Bank, BlackRock Inc. were among the firms that expressed interest in buying. Of the above bidders, its talks with Avendus were in the final stages. However, the deal did not go through.

LIC Mutual Fund is likely to acquire IDBI Mutual Fund. This has come after LIC has bought 238 crore equity shares of IDBI bank amounting close to Rs.14,500 crore. Earlier in October 2018, Life Insurance Corporation of India (LIC) made an open offer to acquire 26% stake in IDBI Bank. The acquisition might take some time due to regulatory approvals. As per December 2018 quarterly AUM, LIC MF manages Rs.13,378 crore and IDBI MF Rs.8599 crore. If the deal goes through, the AUM of the combined entity would be close to Rs.22,000 crore. Currently, by AUM size, LIC MF ranks nineteenth and IDBI twenty-fifth. The combined entity would overtake Mirae Asset and Motilal Oswal to reach sixteenth position. This acquisition would allow LIC MF to leverage IDBI’s branch network and target clients in B30 locations.

HDFC Securities in a recent report observed that amongst the bank backed fund houses Axis MF (47.6%) has highest reliance on its associate bank followed by SBI MF (35.2%). Meanwhile, Kotak MF (8.8%) has the least dependence on its associate bank amongst the top nine fund houses. In absolute terms, SBI brought inflows of close to Rs. 90,000 crore for SBI MF. In the second place comes ICICI MF where ICICI Bank contributed around Rs. 56,000 crore in AUM. What this means is that bank sponsors continue to drive substantial inflows for their associate fund houses. This is not surprising because with their large branch network banks can reach a wider retail consumer base. Consequently, mutual funds with associate banks tend to fetch higher premium in mutual fund space. Moreover, in the last few years, third party cross-selling that is selling other financial products like insurance and mutual funds has become a lucrative income stream for banks. In terms of inflows from non-associate AUM, UTI MF (90.6%) ranks at the top spot followed by Franklin MF (81.5%) as these fund houses do not have any bank promoter.

Regulatory Rigmarole

 After giving the green signal to side-pocketing, SEBI has given the option to fund houses to segregate bad assets. But there are strict conditions to prevent misuse. Debt mutual funds will now be able to segregate their portfolios and carve out bad securities. The capital market regulator, Securities and Exchange Board of India (SEBI) said, in a circular, that in case where the credit rating of an instrument held by a debt fund gets downgraded to "below investment grade" (below BBB-rating) then fund houses can choose to segregate such bad securities and allow investors to continue to buy or sell the good portion of the scheme. The segregated portfolio will not allow any fresh investments. In simple words, your holding in the scheme would be split into two; the good part and the bad part, with an equal number of units in both. You can choose to sell the good units and exit, but the bad units will be frozen until your fund recovers the dues from the bad assets. Both the good and bad (segregated) part of your scheme will have net asset values (NAV). SEBI has given the option to fund houses to decide whether or not they want to go ahead and segregate assets. But fund houses will not be able to do this immediately. The market regulator has mandated that those fund houses who think they may use this facility need to first mention it in their Scheme Information Documents (SID).

 

Keeping in mind the growing instances of cybercrimes globally, SEBI has asked fund houses to put in place robust cyber security and cyber resilience framework to deal with such cyber threats and data breach. In a circular, SEBI said, “With rapid technological advancement in securities market, there is greater need for maintaining robust cyber security and to have a cyber-resilience framework to protect integrity of data and guard against breaches of privacy.” Here are some key highlights of the circular

·         AMCs will have to appoint Chief Information and Security Officer (CISO) who will assess, identify and reduce cyber security risks, respond to such incidents and establish appropriate controls

·         AMCs board will have to constitute technology committee comprising experts in technology. This committee will review existing framework of the AMCs and instances of cyber security on a quarterly basis

·         MFs will have to identify their critical assets, which are prone to such risks

·         MFs will have to encourage third party providers, RTAs, custodians, brokers and distributors to have similar standards of information security

·         MF officials of any rank do not have right to access confidential data. Any access to AMCs should be for a defined purpose or defined period

·         MFs will have to implement strong password for users’ access to systems, apps and networks. AMCs will have to provide two-factor authentication at log in.

·         MFs will have to deploy additional controls and security measures to supervise staff

·         Employees and outsourced staff who have access to such systems will be subject to stringent supervision and access restriction

·         Alerts should be generated in an event of detection of unauthorized system activity

·         MFs have to impart trainings to employees and outsourced staff to increase awareness

The circular will come into effect from April 1, 2019.

SEBI has asked fund houses to reduce portfolio concentration risks in index funds and ETFs. Here are some key highlights of the circular

·         ETFs/ index funds can only mimic an index having a minimum of 10 stocks as its constituents

·         No single stock shall have more than 35% in the index. For sectoral or thematic indices, such a weightage cannot be more than 25%.

·         The weightage of top three constituents of the index should not exceed 65% of the index

·         The individual constituent should be frequently traded i.e. with frequency of at least 80%

The circular will be come into effect from April 10, 2019.

SEBI has opened up covered calls to the mutual fund industry. Covered calls are a complex strategy in which a fund manager can write a call option contract if he has neutral view on a particular stock. Unlike derivative strategies where volatility has a key role to play, covered calls work well in flat market conditions. Through this, the scheme can generate money to the extent of premium paid by traders. In the circular issued, SEBI said that equity fund managers could write call options only under a covered call strategy for stocks traded on Nifty 50 and BSE Sensex. However, the total notional value of such call options should not exceed 15% of the total market value of equity shares held in that scheme. The total number of shares underlying the call option should not exceed 30% of the unencumbered shares in a scheme. SEBI further clarified that schemes cannot write call option of a share if it is not underlying. Also, a call option can be written only on shares which are not hedged using other derivative contracts. The fund house will have to do mark to market valuation of NAV by factoring in respective gains or loss into the daily NAV of the scheme. Earlier in August 2018, SEBI had constituted a sub-committee of the mutual fund advisory committee (MFAC) to look at the pros and cons of introducing covered calls in mutual funds. Such a strategy is well suited for long term players like mutual funds. This would help investors generate marginal returns even during flat market conditions.

In a letter issued to JM Financial, SEBI has clarified that alternative investment funds can invest its unutilized funds in the units of liquid funds. AIFs can also invest their unutilized portion in bank deposits and liquid assets of higher quality such as treasury bills, commercial papers and certificate of deposits. However, AIFs will have to keep their unit holders informed about such exposures, said SEBI. In the letter, SEBI said, “The provisions under regulations is provided in the interest of investors with respect to un-invested portion of the investable funds till deployment of these funds as per the investment objective. Considering this, SEBI registered AIFs may invest investment income or proceeds arising from sale/transfer of the investment or returns from the investment (dividend or interest on securities) in liquid funds, bank deposits or other liquid assets of higher quality. However, to ensure the transparency and disclosure requirements as specified in AIF regulations, the AIFs shall disclose information about the proposed transaction periodically to the investors.” Earlier, JM Financial sought a clarification if JM Financial India Fund II, a category II AIF can invest unutilized funds arising out of receipt of proceeds from sale/transfer of investment or returns earned from investments such as dividend or interest in liquid funds.

SEBI has revised reporting norms for mutual funds. The new Monthly Cumulative Report (MCR) will capture details such as number of folios in each scheme, gross inflows, net inflows/outflows, net AUM, Average AUM and so on. AMCs will have to do such reporting at scheme level. The revised MCR is in line with the categorisation and rationalisation of mutual fund schemes that aims to eliminate duplication in offerings across schemes within the fund house. The new report directs fund house to put one scheme in each category. The new reporting norms will come into effect from April 1, 2019. AMCs will have to ensure that they share the report within three working days of the month.

In a major relief to mutual fund distributors, the government has deferred the implementation of reverse charge mechanism (RCM) till September 30, 2019. The move will benefit mutual fund distributors, who do not have a GST registration number and who have surrendered their GST registration number. These distributors should have earnings of less than Rs.20 lakh a year. For distributors with GST registration, AMCs continue to follow forward charge mechanism, i.e., AMCs will pay the gross commission to them. These distributors can avail of the benefits of input credit. Earlier this month, the government introduced composition schemes for services sector. Under the scheme, service providers earning up to Rs.50 lakh could pay GST rate of 6% instead of 18% with effect from April 1, 2019. However, these service providers cannot avail input credits if they opt for the composition scheme. Also, they will have to pay taxes quarterly but file returns annually. Moreover, the composition scheme in the current form does not allow service providers to avail benefits if they have interstate services.

The year 2018 was an action-packed one for the Rs 23 lakh crore Indian mutual funds industry as well as for investors in it. While the S&P BSE Sensex gained 6% year-to-date, equity funds disappointed. Large-cap funds fell 4% on an average in 2018, mid-cap funds were down 14% while small-cap funds were off a steep 21%, as per Value Research. Funds got friendlier as costs were pushed down and steps were taken to curb misselling. Fund categories - and all schemes within - got standardised. This made it easier for investors to compare one fund with another. The major piece of bad news, however, was the introduction of long-term capital gains tax (LTCG) on equity funds in Budget 2018. How far the provisions of Budget 2019 impacts the mutual fund industry remains to be seen.

 

NFONEST

January2019

NFOs of various hues adorn the January 2019 NFONEST.

SBI Debt Fund Series C 38

Opens: January 15, 2018

Closes: January 22, 2018

SBI Mutual Fund launched the SBI Debt Fund Series C-38 (1224 Days), a close-ended debt scheme. The investment objective of the scheme is to provide regular income and capital growth with limited interest rate risk to the investors through investments in a portfolio comprising of debt instruments such as government securities, PSU and corporate bonds and money market instruments maturing on or before the maturity of the scheme. The scheme’s performance will be benchmarked against CRISIL Medium Term Debt Index and its fund manager is Ms. Ranjana Gupta.

Baroda Money Market Fund

Opens: January 16, 2018

Closes: January 22, 2018

Baroda Mutual Fund has launched Baroda Money Market Fund an open ended debt scheme which aims to provide its investors reasonable returns, commensurate with low risk while providing a high level of liquidity through investments made in money market instruments. Baroda Money Market Fund will invest up to 100% of its assets in money market instruments of varying ratings including unrated debt securities. The scheme will not have any exposure to debt derivatives, securitized debt, REITs and INViTs and foreign securities. The scheme will be benchmarked against CRISIL Money Market index. The index tracks the performance of a money market portfolio comprising of a blend of commercial papers (CP), certificates of deposits (CD) and treasury bills (T-Bill). The scheme will be jointly managed by Mr. Alok Sahoo and Mr. Karn Kumar. Baroda Credit Risk Fund is another scheme which is being jointly managed by the duo. Baroda Credit Risk Fund has generated a return of 7.11% and 9.79% over a period of 1 year and 3 year respectively.

Tata Balanced Advantage Fund

Opens: January 9, 2018

Closes: January 23, 2018

Tata Mutual Fund has launched its open ended dynamic asset allocation fund - Tata Balanced Advantage Fund. The scheme aims to provide capital appreciation and income distribution to the investors by using equity derivatives strategies, arbitrage opportunities and pure equity investments. The fund will follow an in-house model called the PE plus model, which would factor in other market dynamics other than intrinsic value, to decide scheme allocation. The model allows 10% variation to the basic PE based equity allocation; driven by correlation to select global markets (relevant to Indian equities), implied volumes (to identify extremes – fear vs. complacency), momentum indicators (price based indicators to avoid early entry/exit in a directional market). The basic goal of the strategy is to be able to manoeuver the investment allocation in accordance with the prevailing market conditions to make money work harder. The fund would make use of various alternative models depending upon macro, fundamental factors and fund manager outlook to determine the unhedged equity allocation. The fund is benchmarked against the CRISIL Hybrid 35+65 Aggressive Index. The fund managers are Mr. Rahul Singh, Mr. Sonam Udasi, Mr. Sailesh Jain and Mr. Akhil Mittal.

LIC Short Term Debt Fund

Opens: January 11, 2018

Closes: January 25, 2018

LIC Mutual Fund has launched LIC Short Term Debt Fund, an open-ended short-term debt fund scheme investing in instruments with Macaulay duration between 1 year and 3 years opportunities. The fund manager will use quantitative analysis while accessing the short-term debt opportunity and invest in securities that are rated investment grade by credit rating agencies or in unrated debt securities, which the investment manager believes to be of equivalent quality, says the fund house. The fund manager will emphasize on credit analysis to determine credit risk and the investment process will follow a top down approach considering aspects like interest rate view, term structure of interest rates, systemic liquidity, RBI’s policy stance, expectations on inflation and so on. The scheme is beneficial for the investors who have moderate risk appetite and an investment horizon for 3 years. The fund is benchmarked against the CRISIL Short Term Bond Index. Marzban Irani will manage the fund.

SBI Corporate Bond Fund

Opens: January 16, 2018

Closes: January 29, 2018

SBI Mutual Fund has launched SBI Corporate Bond Fund which aims to provide the investors an opportunity to predominantly invest in corporate bonds rated AA+ and above to generate additional spread on part of their debt investments from high quality corporate debt securities. The open-ended debt scheme intends to maintain moderate liquidity in the portfolio through investment in money market securities. SBI Corporate Bond Fund will invest 80%-100% of its assets in Corporate Bonds rated AA+ and above and around 0%-20% in other debt instruments, Central and State Government (s) dated securities and money market instruments. The scheme can also invest 0%-10% in units of REITs and InVITs. The scheme will be benchmarked against NIFTY Corporate Bond Index. The index measures the performance of AAA rated corporate bonds across 6 duration buckets (Macaulay Duration). The scheme will be managed by Mr. Rajeev Radhakrishnan. Other funds being currently managed by him include SBI Short Term Debt Fund and SBI Magnum Ultra Short Term Debt Fund. These funds have given a return of 6.85% and 8.19% respectively over a period of last 1 year.

Aditya Birla Sunlife Dual Advantage Fund - Series 2

Opens: January 17, 2018

Closes: January 31, 2018

Aditya Birla Sunlife Dual Advantage Fund – Series 2 is a close ended hybrid scheme. The primary investment objective of the scheme is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the scheme. The secondary objective is to generate capital appreciation by investing a portion of the scheme corpus in equity and equity related instruments. The fund is benchmarked against the CRISIL Hybrid 75+25 - Conservative Index. The fund managers are Mr. Mohit Sharma (for debt assets), Mr. Vineet Maloo (for equity assets) and Mr. Ajay Garg (for Index Options).

Edelweiss Small Cap Fund

Opens: January 18, 2019

Closes: February 1, 2019

Edelweiss Mutual Fund has launched Edelweiss Small Cap Fund, an open-ended scheme predominantly investing in small cap stocks. The investment objective of the scheme is to generate long term capital appreciation from a portfolio that predominantly invests in equity and equity related securities of small cap companies. The fund offers a facility — Smart Trigger-enabled Plan (STeP), which helps an investor to invest in a staggered manner and mitigates market timing risk. This feature is available only during the NFO. Through the STeP facility, investors can spread their investment in Edelweiss Small Cap Fund in five equal monthly instalments. Under the STeP facility 20% of the application money (1st instalment) will be invested upfront in the Edelweiss Small Cap Fund on February 19, 2019 (the date of allotment). The remaining 80% of the application money will be invested in the Edelweiss Liquid Fund in 4 equal instalments over the period of following 4 months. The 2nd instalment (20% of the application amount) will be made in the Edelweiss Liquid Fund on March 19, 2019 if the small cap index falls by 3% from the date of allotment, otherwise on last business day of the month. Similarly, the 3rd, 4th and 5th instalments will be made with a 6% fall in the month of April, 9% fall in the month of May and 12% fall in the month of June respectively in the small cap index. The money invested in the Edelweiss Liquid Fund will be subsequently switched into Edelweiss Small Cap Fund. The benchmark for the fund is the Nifty Small-Cap 250 TR Index. The index represents the balance 250 companies (companies ranked 251-500) from NIFTY 500. Harshad Patwardhan, CIO – Equities, Edelweiss Mutual Fund will manage this fund.

Sundaram Equity Fund, SBI Capital Protection Oriented Fund Series A – Plan 1 & 2, DSP Quantamental Fund, BNP Paribas Overnight Fund, BNP Paribas Dynamic Equity Fund, SBI Debt Fund Series C- 41 to 50, ITI Arbitrage Fund, ITI Long Term Equity Fund, IDFC Emerging Businesses Fund, IIFL Global Innovation Fund, ITI Liquid Fund, ITI Multi-Cap Fund, Mahindra Overnight Fund and Parag Parikh Tax Saver Fund are expected to be launched in the coming months.

GEMGAZE

January 2019

The consistent performance of all five funds in the January 2018 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the January 2019 GEMGAZE.

HDFC Balanced Advantage Fund (formed from the merger of erstwhile HDFC Prudence Fund and HDFC Growth Fund) Gem

HDFC Balanced Advantage Fund is the largest fund in the category with assets amounting to Rs 38,502 crore. The fund, managed by Prashant Jain, widely regarded as one of the most competent money managers, has delivered an annualised return of 18.55% since its inception. HDFC Balanced Advantage Fund, with its long-standing stellar track record of delivering 18.62% compounded annually over the last 10 years, towers over the category average of 12.97% annually over the same period. Over a three- and five-year horizon, the fund returned an annualised return of 11.93% and 15.99%, respectively as against the category average returns of 8.9% and 11.75%, respectively, over the same period. The fund earned a return of -3.97% in the past one year as against the category average of 1.02%. But in the past 3 months the returns have been 6.8% as against the category average of 3.44%. HDFC Balanced Advantage Fund has a diversified quality portfolio with a blend of growth and value. The allocation to a single stock has been capped at around 9.03%, with the highest currently allocated to ICICI Bank. There are 73 stocks in the portfolio and the top three sectors are finance, energy, and construction, which constitute 56.95% of the portfolio. The portfolio turnover is 18% and it has an expense ratio of 1.98%. The fund is benchmarked against NIFTY 50 Hybrid Composite Debt 65:35.

ICICI Prudential Equity and Debt Fund (erstwhile ICICI Prudential Balanced Fund) Gem

Launched in November 1999, ICICI Prudential Equity and Debt Fund is a very popular product in this category. The fund has earned a return of -2.47% over the past one year as against the category average of -4.28%. But in the past one month the fund has earned a return of 3.83% as against the category average of 2.35%.The three-year and five-year returns are also more than the category average of 10.36% and 13.85%, respectively at 12.93% and 15.88%, respectively. The fund has 71.24% of its portfolio invested in equity comprising 86 stocks. This Rs 26,695 crore fund has 41.71% of the portfolio in the top three sectors, energy, finance and metals. The fund has traditionally featured a high equity allocation, hovering at well over 70%, and it continues to maintain it at 71.21% of the portfolio. In terms of style, the fund follows a blend of growth and value styles. On the debt portion, the fund does take aggressive duration calls. Throughout 2015-16, for instance, the average maturity was higher than 10 years. This has been toned down lately to four to five years as interest rates have headed lower. While the fund seeks to add to returns based on rate calls, it is very conservative about taking on credit risks. Sovereign and money-market securities dominate its portfolio. Traditionally, the equity portfolio has been mid-cap biased. But in the last one year, its weight has veered sharply towards large-cap stocks. The fund is now significantly overweight on large-caps relative to the category. The expense ratio of the fund is 1.95% while the portfolio turnover ratio is 234%. The fund is benchmarked against CRISIL Hybrid 35+65 Aggressive. Sankaran Naren, the veteran fund manager, manages this fund along with Manish Banthia and Atul Patel.

Tata Hybrid Equity Fund (erstwhile Tata Balanced Fund) Gem

This consistent fund has managed an impressive performance amid the swinging markets of the last seven years. It has been among the top ten funds in the balanced category in eight of the last ten years. This fund has handsomely outperformed the benchmark as well as the category over the last ten years. Ten year returns have been 17.18%. This compares very well with the category average of 14.99%. The one-year return of this Rs 4,822 crore fund is -4.17% as against the category average of -4.28%. Returns of 7.16% and 14.02% respectively, as against the category average of 10.36% and 13.85% during a three- and five-year period, reflects the fund's ability in stock selection. The fund did not fare well in the bear market of 2008, but it navigated 2011 quite well. The fund has a 75-25 equity-debt allocation, with its equity exposure consistently above 70%.  Large-cap stocks usually make up 60 to 70% of the exposure, but the proportion has been pegged up sharply to over 84% lately. The fund is now quite overweight on large-caps compared to its peers. The fund follows a growth at reasonable price (GARP) style of investing. It believes in buying businesses with good earnings growth prospects over the medium term and those which are run by quality managements. Each sector is played through a basket of five to eight companies. The top holdings are capped at 4 to 5% to reduce concentration and to capture more opportunities. The debt portion has allocations mainly to G-secs and AAA rated paper. The average maturity stood at about five years in January 2018. Finance, automobile and FMCG are the top three sectors. In terms of portfolio construction, the top three sectors comprise 46.15% of the portfolio mix. The fund has 29 stocks in the portfolio. The fund is benchmarked against CRISIL Hybrid 25+75 Aggressive Index. The portfolio turnover ratio of the fund is 204% and the expense ratio is 2.13%. The fund is managed by Murthy Nagarajan and Chandraprakash Padiyar.

Reliance Equity Hybrid Fund (erstwhile Reliance Regular Savings Fund)   Gem

Reliance Equity Hybrid Fund is an equity-oriented balanced fund with 73.81% in equity. The one-year return of this Rs 13,171 crore fund is -6.29% as against the category average of -4.28%. Returns of 9.57% and 15.15% respectively, as against the category average of 10.36% and 13.85% during a three- and five-year period, reflects the fund's ability in stock selection. 46.42% of the portfolio is in the top three sectors, finance, construction and energy. The fund has a very compact portfolio of 58 stocks. The fund is benchmarked against CRISIL Hybrid 35+65 Aggressive. The portfolio turnover ratio of the fund is 131% and the expense ratio is 1.97%. The fund is managed by Mr. Amit Tripathi and Mr Sanjay Parekh.

Canara Robeco Equity Hybrid Fund (erstwhile Canara Robeco Balanced Fund renamed as Canara Robeco Equity Debt Allocation Fund) Gem

Canara Robeco Equity Hybrid Fund is the oldest balanced fund that has exhibited smooth sailing across market cycles. The one-year return of the fund is 0.75% as against the category average of -4.28%. The fund’s three-year and five-year returns of 10.36% and 15.4% respectively are higher than the category average of 10.36% and 13.85% respectively. Canara Robeco Equity Hybrid Fund has 51 stocks in the portfolio. 38.74% of the portfolio is in the top three sectors, concentrated in finance, energy and construction sectors. The good performance of Canara Robeco Equity Hybrid 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 Hybrid 35+65 Aggressive. The expense ratio of this Rs 1,883 crore fund is 2.41% with a portfolio turnover ratio of 394%. The fund is managed by Mr. Avnish Jain, Mr Shridatta Bhandwaldar and Mr. Krishna Sanghvi.

FUND FLAVOUR

January 2019

A Balanced Fund is a mutual fund which provides a one-stop investment mix by investing its portfolio in a mix of debt and equity investments with an aim to balance the risk-reward ratio and ensure to provide a return which over time provides a perfect blend of equity and debt exposure. In this, the fund manager allocates your money in both debt and equity as an asset class in a certain proportion. The equity: debt proportion depends solely on the orientation of the fund. In India, Balanced Mutual Funds typically invest 50% to 70% of their portfolio in stocks and the remainder of their resources in bonds and other debt instruments. Balanced funds help you to ride the equity wave while still maintaining a low-risk profile. They invest the fund’s assets in equity shares as well as debt instruments in a specific ratio according to the investment mandate of the fund. 

Balanced funds, the most popular type of hybrid funds, are essentially divided into two types - Equity-Oriented Balanced Funds and Debt-Oriented Balanced Funds. Until a few months ago, Balanced Funds were synonymous with equity-oriented Hybrid Funds that invested over 65% of their assets in equity. Clearly, Balanced Funds were not true to their name. But there was a reason for this lopsided allocation. In order to qualify as an equity scheme, a minimum equity allocation of 65% is required. Since, equity schemes enjoy a tax advantage over debt schemes, an additional 15% exposure did not seem to do much harm. At the end of the day, investors would benefit. However, most schemes classified as Balanced Funds were free to vary their exposure to equity, ranging from a minimum 65% to as much as 80%. This drew a lot of flak from the regulator. After years of deliberation, the regulator had its way by coming out with the Categorisation and Rationalisation of Mutual Fund Schemes. This reform has the sole objective to create uniformity among the different categories of schemes managed by various fund houses.

As per the new norms of SEBI on recategorisation of mutual funds, there are 7 categories of hybrid funds.

•  Conservative hybrid – These schemes invest around 75-90% of the total assets in debt instruments and 10-25% in equity instruments.

•   Balanced hybrid – True to its name, Balanced Hybrid Funds are pure balanced funds that invest around 50% of their assets in equity and the balance in debt. Here, hedged equity positions or arbitrage exposure is not allowed. While these funds offer investors an equal exposure to equity and debt, they are not very tax efficient. In terms of performance, schemes investing according to such an asset allocation have been virtually non-existent, as fund houses preferred keeping the exposure in excess of 65%, so as to avail of tax benefits. Hence, there are no funds with a reliable track record of performance.

•  Aggressive hybrid – The composition of these funds includes investments of around 65-80% of total assets in equity related instruments and the remaining in debt instruments, a minimum of 20% debt allocation is specified. These funds have the flexibility to include an arbitrage exposure.

•  Multi asset allocation –This category invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes.

•  Arbitrage funds – These schemes, as the name suggests, follow arbitrage strategy and invest at least 65% of total assets in equity related instruments.

•  Equity savings funds – These are open ended schemes investing a minimum of 65% of the total assets in equity and a  minimum of 10% of the total assets in debt.

•  Dynamic asset Allocation – These are also known as Balanced Advantage funds. As the name suggests, the funds under this category can dynamically manage the asset allocation with no restriction on the minimum or maximum exposure. The fund can choose to be fully allocated either to equity or debt instruments depending on the fund manager’s view of the market. Certain Dynamic Funds have a formula driven approach that takes into consideration market valuations and other factors. The allocation is pre-decided based on the formula that defines the equity exposure based on the different variables. Though Balanced Advantage funds also set their asset allocation as per the direction of the market, they tend to keep a minimum 65% exposure to equity at all times.

As an investor, you need to take a closer look at the asset allocation strategy of such funds. If the fund chooses to continue with the investment strategy as before, you need not worry. However, if there is a change in investment attributes, it will warrant a closer look – the past performance of such schemes cannot be considered. Such funds suit moderate-to-high risk profile investors, given that the funds would invest predominantly in equity assets. While the fund may try to reduce volatility by dynamically managing the unhedged equity exposure, very few funds have been successful in doing so. Hence, it will be pertinent to have a look at the historical performance of the fund before investing. How well such funds perform is highly dependent on the fund managers’ skill and experience, as well as the formula adopted to set the asset allocation.Which of these fund categories is a better option? The Aggressive Hybrid Fund category is the most promising of the lot. The asset allocation will be stable and the returns tax-efficient, hence, you will be able to fit in such funds seamlessly into your financial plans.

 

Advantages of Balanced Mutual Funds

Best of Both Worlds

Balanced funds are suitable for investors who want to enjoy the returns from equity investments but with a safety cushion. Normally this is true for first time investors or investors who have low to moderate risk appetite. Since balanced funds are a mix of Equity and Debt, they have lower volatility than the Equity Funds and their returns are higher than the Debt funds. Though in a bull market these funds will not give you as much return as pure equity funds, the loss would be lower than those funds in a downward moving market.

Rebalancing

The Balanced funds have to maintain the portfolio according to their mandate. For example, debt oriented balanced funds have to keep at least 65% of their investments in Debt instruments hence whenever Equity portfolio of the fund crosses 35%, the Fund Manager will book profit from equities and rebalance the portfolio. The fund manager rebalances the portfolio based on market conditions and asset allocation limits periodically and maintains the asset allocation without any tax implications or exit load. This will reduce the volatility and also preserve the gains. This obviates the need for manual re-balancing.

Tax Efficiency

For taxation purpose, equity-oriented balanced funds are treated as equity funds. Hence, even though such funds have a certain portion of debt portfolio, the debt portfolio will also be tax-free.

This seems to be the biggest advantage to many. In case you separate your asset allocation between debt and equity by investing separately in debt funds or equity funds, then for debt part, whether in short term or long term, you have to pay the tax (based on tax rules shared above). However, with equity-oriented balanced funds, such debt part is completely tax-free.

Diversification

Balanced Mutual Funds provide the convenience of diversification in the form of a single docket of a mutual fund. An investor thus need not go through the hassle of analyzing and selecting a bouquet of funds. A professionally trained and experienced fund manager does this job for the investor. A calculated combination of debt and equity components makes the funds less vulnerable to market volatility. The equity components of the fund are aimed at generating capital appreciation and their debt components serve as securities to shield the investment from unforeseen market corrections.

Better risk-based returns

Balanced Mutual Funds have given better risk-adjusted returns in the long run compared to equity returns. The 5-year rolling return of balanced funds is 13.2% as against 12.9%, 13.96% and 14.91% in the case of large cap, mid cap and diversified funds respectively. The Standard deviation of balanced funds is 2.9% as against 3.47%, 3.82% and 3.96% in the case of large cap, mid cap and diversified funds respectively.

 

Disadvantages of Balanced Mutual Funds

 

While it might seem that balanced funds are virtually risk-free, it is not entirely the case. Balanced Mutual Funds have their own share of risk. In the case of a direct investment across a number of stocks and debt instruments, one can relocate the resources among different funds as diversification for tax planning or wealth creation. However, in balanced funds, since the decision of resource allocation is with the fund manager, customised diversification is not possible.

Myopic view

Due to the advantages, many investors, in fact, many advisors are recommending equity-oriented balanced funds for short-term goals which may be even less than 5 years. They completely neglect the equity exposure of such funds.

Poor understanding of the portfolio

Many investors are of the opinion that debt part of the portfolio is totally safe. But they fail to understand the type of debt instruments they are investing. Even in case of the equity portfolio, analysis of the stocks the fund is holding is of paramount importance. If the fund has higher exposure towards mid and small cap stocks, then it is riskier than holding a pure large cap fund.

Selection Factors for investment in Balanced Mutual Funds

• You should consider the following factors for selecting balanced funds:

•  Asset size of a fund should be a reasonable threshold level. A minimum asset size of Rs.500 crore can be considered.

•   Past performance is one more indicator for the selection of the right mutual funds. Past five years’ fund performance history can be considered.

•  Fund manager profile is a key factor. Fund manager should be experienced and capable of generating good returns.

•  Asset allocation by balanced funds that allocates properly between equity and debt helps the investor to diversify. If your risk appetite is low, it is better to choose funds which do not have more 70% exposure to equity.

• Consistent performance of the funds is one of the key parameters

• As per latest categorization balanced fund category is renamed as Hybrid Fund. This includes conservative hybrid fund, balanced hybrid fund, aggressive hybrid fund and dynamic asset allocation fund. You should select fund category carefully.

•  Another factor to consider while selecting a mutual fund is the reputation of the fund house. A fund house should be renowned and should be at least 5-10 years old.

• Mutual fund rating is another important factor for consideration. You should select a mutual fund with a higher rating. Consider rating given by CRISIL and Value research for the selection.

• Expense Ratio plays a major role in deciding fund performance. The expense ratio is a fee charged by the investment company to manage the funds of investors. Lower the expense ratio, better the fund performance.

 Factors an investor should consider

 

a. Risk

Even though they have a certain percentage of the fund’s assets allocated to debt instruments, balanced funds are not completely risk-free. The equity component of the balanced fund makes the fund vulnerable to market risks. Market risk causes the fund value to fluctuate in accordance with the movements of the underlying benchmark. Balanced funds are less risky as compared to pure equity funds; but in order to gain the maximum out of your investment, you need to exercise caution and rebalance your portfolio regularly.

b. Return

If you are a moderately aggressive investor, then you might think of investing in balanced funds. Historically, equity-oriented balanced funds have been found to deliver average returns in the range of 10%-12%.  In spite of having the debt component in its portfolio, balanced funds do not offer guaranteed returns. The performance of underlying securities affects Net Asset Value (NAV) of these funds and may fluctuate due to market movements. Moreover, these might not declare dividends during market downturns.

c. Cost

Balanced funds charge an annual fee for managing your portfolio which is known as expense ratio. It is shown as a percentage of fund’s average assets. It reflects the operating efficiency of the fund and becomes an important criterion at the time of fund selection.  Before investing in a balanced fund, you need to compare its expense ratio with that of competitive funds. Ensure that it has a low expense ratio as compared to peer funds. This will translate into higher take-home returns for the investor.

d. Investment Horizon

Balanced funds may be ideal for a conservative investor who is ready to invest his savings in 5-year bank fixed deposits (FDs). As compared to an FD, balanced funds may deliver higher returns over a medium-term investment horizon of say 5 years. In addition, you would get the benefit of indexation on long-term capital gains on the debt components. If you want to earn a risk-free rate of return, you may go for arbitrage funds which bet on price differentials of securities in different markets.

e. Financial Goals

Balanced funds may be used for intermediate financial goals which can be achieved in a period of 5-7 years. If you have goals like buying a car or funding higher education, you may consider balanced funds as a means to finance these goals. Even budding investors who are not opting to manage their portfolio actively but have a low-risk appetite may also invest in balanced funds. Retirees may invest in balanced funds and go for a dividend option to supplement their post-retirement income.

f. Tax on Gains

The capital gains on balanced funds are taxed based on the orientation of the fund. Equity-oriented balanced funds are taxed just like pure equity. If you hold your investment for more than a year, the capital gains are treated as long-term capital gains. Long term Capital Gains (LTCG) in excess of Rs 1 lakh on equity component are taxed at the rate of 10% without the benefit of indexation. Short-term capital gains on equity component are taxed at the rate of 15%. The debt component of balanced funds is taxed like debt funds. STCG from debt component is added to the investor’s income and taxed according to his income tax slab. LTCG from debt component is taxed at the rate of 20% after indexation and 10% without the benefit of indexation.

Why Balanced Mutual Fund is the Best Investment Option?

Balanced Funds are the most convenient investing option for the investors who want to gain good earnings on mutual funds, but do not wish to take the risk of stock market fluctuations. By making investments in equities and debts, they provide the benefits of both the worlds. The equity-oriented balanced fund offers capital growth in the medium to long run, while the debt-oriented fund aims to generate steady returns. Thus, the investors can gain substantial income on their investments. In balanced funds, equities provide the benefits of shielding the battle of inflation which if not managed can erode the purchasing power in the later years. The equity market faces many swings as things are never certain in the stock exchange market and investors wish to invest in the funds which provide greater benefits. The best balanced funds provide an advantage of asset allocation as per the market conditions. When the market performance is poor, the fund manager shifts the asset allotment in the debt instruments, and when the market is expected to rise, funds are parked in the equity stocks. This way, the returns are balanced, and investors do not face fluctuations in their earnings. The balanced fund is the vintage bicycle of investing. It may be old fashioned but it endures because of its sturdy simplicity and its sheer usefulness.