Monday, January 27, 2020

January 2020

Mutual funds have added a whopping Rs 3.15 lakh crore to their asset base in 2019 on the back of robust inflows in debt schemes and measures taken by regulator SEBI for boosting investor confidence. The asset under management (AUM) of the industry rose by over 13 percent (Rs 3.15 lakh crore) to Rs 26.77 lakh crore at the end of November 2019, up from Rs 23.62 lakh crore at the end of December 2018, as per the latest data available with the Association of Mutual Funds in India (AMFI). The AUM growth seen by the 44-member mutual fund industry in 2019 is significantly higher than 7.5 percent witnessed in 2018. However, the growth was much higher at 32 percent in 2017, when the asset base expanded by over Rs 5.4 lakh crore. The double-digit growth is a positive sign given the negative sentiment about equity and fixed income securities. This growth should be primarily credited to inflows in debt-oriented schemes, steps taken by SEBI that boosted investor confidence, and to distributors for helping take the message of "mutual fund sahi hai" (mutual funds are right) to every nook and corner of the country. While SIP (Systematic Investment Plan) inflows were impressive with around Rs 8,000-crore-plus, the overall equity excitement was missing. The positive side to this is that investors have not lost their complete faith in equity investments and trust the process of SIP. The year 2019 marks the seventh consecutive yearly rise in the industry AUM after a drop during the two preceding years. The AUM of the industry has grown from Rs 8.22 lakh crore in November 2009 to Rs 27 lakh crore in November 2019, indicating an over three-fold jump in 10 years. The year has also seen repayment issues and downgrades with certain companies, which affected investor sentiment. However, this has also resulted in investors becoming more aware about the overall risk involved with different categories of mutual funds and they now choose funds based on their risk appetite.

India's mutual fund space witnessed a strong inflow in December 2019. Data released by AMFI shows the net equity inflow stood at Rs 4,432.2 crore for December 2019 against Rs 933 crore in November 2019. The balanced fund outflow stood at Rs 2,040 crore against Rs 4,932 crore month-on-month (MoM). On the other hand, liquid funds witnessed an outflow in December 2019 against an inflow in November 2019. Liquid fund outflow was at Rs 71,158.5 crore against an inflow of Rs 6,938 crore MoM, according to AMFI data. Equity ETF inflow came at Rs 12,673.5 crore in December 2019 against Rs 2,954.5 crore in November 2019. Retail investors continue to repose trust in mutual funds as reflected by continued flows through SIPs, despite challenging domestic economic scenario and global trade issues and conflicts. Largecap funds witnessed an inflow of Rs 1,134.80 crore while the mid and smallcap funds saw an inflow of Rs 796.08 crore and Rs 421.63 crore, respectively, in December 2019. Index funds saw an inflow of Rs 142.30 crore and inflow in Gold ETF stood at Rs 26.85 crore in December 2019, according to AMFI data.

The MF industry has added 26 lakh new investors in just one and a half years. 2019 ended on a positive note for the Rs.27 lakh crore mutual fund industry. The latest AMFI data shows that the mutual fund industry has 2.03 crore unique investors as on December 2019. The data has identified the number of unique investors by taking into account PANs/PEKRNs (PAN Exempted KYC Registration Number) of all unit holders or their guardians in case of minor unit holders. As on December 2019, the MF industry has 1.98 crore unique investors with PAN permanent account number) and 4.67 lakh investors without PAN. In 2012, SEBI allowed investors to invest up to Rs 50,000 annually in a single mutual fund per year without a PAN. AMFI data shows that the MF industry has 8.71 crore folio as on December 2019.  This indicates that the average MF investor holds close to 4 folios in mutual funds. The Mutual Funds Sahi Hai campaign, growing popularity of SIPs and ease of investment through digital technology has contributed to the industry’s growth story. This could slow down the mutual fund industry’s growth. In September 2019, a report by AMFI-BCG had noted that adding 4 lakh new distributors in next five years will be crucial for the industry to achieve Rs.100 lakh crore AUM.

Of the top 20 fund houses, 19 saw an increase in their assets. Last quarter ended on a good note for most fund houses with the MF industry witnessing 4% growth to reach AUM of close to Rs.27 lakh crore. AMFI data shows that the MF industry average AUM has increased from Rs. 25.69 lakh crore in July-Sept 2019 to Rs.26.77 lakh crore in Oct-Dec 2019. Among fund houses, SBI MF, Axis MF and ICICI Prudential MF witnessed the highest growth in their AAUM, respectively. While SBI MF’s AAUM increased by nearly Rs 32,000 crore to Rs 3.53 lakh crore in October-December, 2019 Axis MF’s AAUM rose by more than Rs 17,000 crore to Rs 1.23 lakh crore. Similarly, ICICI Prudential MF’s AAUM increased by over Rs 13,000 crore to Rs 3.62 lakh crore. Next in the list were IDFC MF and Kotak Mahindra MF. Both these fund houses witnessed an increase of around Rs 10,500 crore and Rs 8,500 crore in their quarterly assets, respectively. In percentage terms, Mirae and Axis were the top gainers at 18% and 16% respectively among the large fund houses. Among the emerging fund houses, ITI MF registered a growth of 179% while PPFAS MF grew by 16%. In October-December, 2019 most of the top fund houses did well with 19 of the 20 top fund houses witnessing an increase in their AAUM. Only Aditya Birla Sun Life MF saw a decline of nearly Rs 4,000 crore in its AAUM in the quarter ended December 2019. Meanwhile, emerging fund houses had a tough time in October-December 2019. Of the 21 fund houses at the bottom, 11 witnessed a decline in their AAUM.

In terms of equity AUM, HDFC MF and ICICI Prudential MF continue to retain the top two spots. The December quarter ended on a positive note for the MF industry with average AUM of pure equity funds and ELSS witnessing over 6% growth to rise past the Rs.8 lakh crore mark, according to AMFI data. An analysis of quarterly average AUM of 36 fund houses shows that SBI MF marked the highest growth in its equity average AUM. The fund house’s equity average AUM rose by Rs 12,822 crore to Rs.74,141 crore, an increase of 21% in just three months. Here equity AUM includes pure equity schemes and ELSS. Axis MF followed the two by registering a growth of 16% or Rs 7,676 crore in its equity AAUM to Rs.54,226 crore. Next in the list were Kotak MF and Mirae Asset MF. These two fund houses witnessed an increase of Rs 5,309 crore and Rs 5,139 crore in their equity average AUM, respectively. Meanwhile, HDFC MF and ICICI Prudential MF retained the first and second spot, respectively in terms of equity AAUM. While HDFC MF’s equity AAUM for Oct-Dec grew to Rs 93,410 crore in December 2019, ICICI Prudential MF’s AAUM stood at Rs 77, 505 crore. Apart from these fund houses, Aditya Birla Sun Life, Nippon India, Franklin Templeton and UTI were among the top 10 MFs in terms of equity AUM. Overall, 16 fund houses saw their equity AAUM rise by more than Rs 1000 crore last quarter.

As on December 2019, SIP AUM was Rs 3.2 lakh crore, around 12% of the overall MF Industry AUM. Inflows through SIP have risen considerably from last fiscal, even as the net addition in SIP accounts has witnessed a slowdown. Net addition in SIP accounts is the difference between number of new registered SIPs and discontinued/matured SIPs. AMFI data shows that between April and December of 2019, the amount collected through SIPs has risen to Rs 74,398 crore, as against Rs 68,479 crore in the corresponding period last fiscal. Meanwhile, the MF industry added 35.5 lakh net SIP accounts during April-December 2019, as against 42.5 lakh accounts in the corresponding period of 2018. This was due to an increase in discontinued or matured SIPs. During April-December 2019, the MF industry added 86 lakh new SIP accounts, while 50.5 lakh SIP accounts matured or were discontinued. In the corresponding period of 2018, the industry added 85.2 lakh SIP accounts while 42.7 lakh SIP accounts matured or were discontinued. The rise in SIP inflows is heartening and it outweighs the slightly lower addition in number of net SIP accounts this year. SIP’s success should be measured on the basis of constantly rising inflows, especially amid concerns over growth and market volatility. This underlines a sharp sustained retail investor interest in equity funds. Moreover, popularity of features such as SIP top-up has led to rise in SIP inflows, even as the net addition in SIP accounts has slowed down. SIP top-up ensures an investor has the option to increase the amount of SIP by a fixed amount at pre-defined intervals. This enhances the flexibility of the investor to invest higher amounts during the tenure of the SIP. As on December 2019, SIP AUM was Rs 3.2 lakh crore, around 12% of the overall MF Industry AUM.

The latest AMFI data shows that individual investors hold 53.4% of total industry assets while institutional investors hold 46.6% as of December 2019. Individual investors include retail investors and high net worth individuals. However, further analysis shows that institutional investors grew at a faster pace than individual investors did as their AUM increased by 13.80% as against 12.64% of individual investors. In terms of weightage, 69% of equity AUM is contributed by individual investors, followed by debt (24%), liquid/money market (6%) and ETFs, FoFs (1%). Contrary to individual investor, institutional investors account for 41% of liquid/money market AUM followed by debt (34%), equity (13%) and ETF, FoFs (12%).  Further analysis of AUM shows that of the total MF AUM, 44% of the assets came through direct plans while the rest came from distributors in December 2019. A large proportion of direct investments were in non-equity oriented schemes where institutional investors dominate. Moreover, 16% of the total industry assets came from B30 cities in December 2019. About 65% of B30 cities assets were equities. 

India's mutual funds industry is yet to see wider participation from the population.  "India remains an extremely underpenetrated country, especially with respect to investing in instruments such as mutual funds," according to a Paytm Money report. "More than 85 percent of investors in mutual funds come from the top 30 Indian cities. This signifies that the rest of India, comprising a majority of the population remains conservative in its choice of investment instrument," the report added. However, Indians from all demographics are fast adopting investments. The report suggests that the trends observed in 2019 will affect the investment patterns in 2020. The report reflected 18,792 out of 19,100 pin codes invested with Paytm Money, within the first year of its operations. Year 2019 saw a massive adoption trend by investors across cities, towns and villages with a substantial share of investors coming from the younger population. The report also suggests that over 65 percent of its investors are between the age group of 18-30 years. Many of these investors are students and first-time employees.

Piquant Parade

SEBI has given in-principle approval to NJ India, India’s largest MF distributor, to set up its AMC business.NJ India would focus on passive funds such as quant funds and smart beta ETFs to grow business. Just like developed markets, passive funds and ETFs have great potential to grow in India. NJ India has hired Anand Shah to set up the AMC business. Anand Shah was Dy. CEO & Chief Investment Officer of BNP Paribas MF before joining NJ Advisory Services as its CEO. Currently, he is responsible for portfolio management services (PMS) business of NJ group. NJ India aims to launch their AMC business in the next six months subject to final approval from SEBI. Earlier, SEBI had given in-principle approval to Samco Securities and Muthoot Finance. While Samco Securities is likely to launch its MF business this year, Muthoot Finance has acquired IDBI Mutual Fund.

Regulatory Rigmarole

SEBI has simplified the process of transmission of units in mutual funds due to absence of nominations or death of unitholders. Among its key measures is bringing uniformity across fund houses in dealing with transfer of assets due to demise of unitholders and spreading awareness about importance of nomination in mutual funds through IAPs. Introduction of image based processing wherever the claimant is a nominee or a joint account holder in the investor folio. AMCs to set up a dedicated central help desk and a webpage carrying relevant instructions to provide assistance on the transmission process. AMCs to introduce a common transmission request form and NOC form. A uniform process across fund houses to deal with unclaimed funds to be transferred to the claimant including the unclaimed dividends. AMCs cannot accept requests for redemption from a claimant until the units are transferred in his favour. Claimant has to pay stamp duty tax. The move will bring uniformity across fund houses in terms of dealing with transfer of assets due to demise of unitholders.

Foreign controlled AMCs (with more than 50% foreign shareholding) have been untagged from the October 17 circular of the Finance Ministry that defined them as overseas investors. The ministry modified the October circular on December 5, 2019. Foreign-owned fund houses would have had to follow certain investment restrictions that are applicable to overseas investors. For instance, if a sector’s stocks have a 74% overseas investment cap, then according to the circular, a foreign-owned AMC could buy these stocks only if the overseas investment in that particular company has not breached the 74% limit. Such restrictions do not apply to domestic investors.  Foreign controlled AMCs had approached SEBI in the first week of November 2019 and the market regulator then discussed the matter with the government. Back in November 2019, SEBI had assured that the October 17 circular would be revised and foreign controlled AMCs would not be treated as overseas investors. Nippon India, Franklin Templeton, Mirae Asset, Invesco and BNP Paribas were among the fund houses that could have been affected the most by the October 17 circular.

Capital markets regulator, SEBI has proposed to discontinue usage of pool accounts by all platforms in transaction of schemes. The discussion paper was issued on December 23, 2019. This proposal comes in the aftermath of the Karvy Stock Broking episode, wherein the broker allegedly misused clients' securities to the tune of over Rs 2,000 crore. SEBI pointed out that asset management companies lose sight of the source of funds as they receive funds from pool or escrow accounts. The regulator noted that the scope of misuse of investments when mutual fund transactions were executed through intermediaries like stock brokers and clearing members and digital platforms provided by MF distributors and investment advisors. Some of the direct mutual fund platforms in India are Kuvera, Goalwise, CAMS & Karvy Website/Mobile App, AMFI’s Mutual Fund Utility, PaisaBazaar, Zerodha, PayTM Money, Groww and Clearfunds. Direct MFs mean investors buy directly from mutual fund companies through their respective portals, which offer such direct mutual funds online. Whereas regular mutual funds mean investors buy through middlemen (online or offline) like mutual fund advisers or brokers. For various MF transaction methods between a stock broker or distributor or investor advisor and the investor, there are layers that get created before it is finalised with the concerned mutual fund. For transaction between the Broker and the investor, it is routed from investor to broker to clearing corporation to the end-mutual fund. For transaction on stock exchange platform between investment advisor/distributor and the investor, it is routed to exchange clearing platform to the end-mutual fund. These layering processes result in pooling actual funds flow or MF units flow being away from direct purview of the mutual fund that is responsible for the investor services. SEBI discussion paper feels this has potential scope of misuse of investor funds or the investor MF units pool. That has driven SEBI to now look for discounting pooling practice and make exchanges create a dedicated platform for direct funds and MF units flow between end-mutual fund and the investor. SEBI’s efforts are consistently aimed towards mutual funds being held directly responsible for investor matters even if that means some additional platform creation or due diligence by market intermediaries and exchanges.
SEBI has proposed allowing individual RIAs to offer distribution services along with fee based advisory model. In its fourth consultation paper on Registered Investment Advisors (RIAs), SEBI has proposed allowing individual RIAs to offer distribution services to their clients along with fee based advisory services. This will be in line with corporate RIAs who currently offer both the services to their clients. However, individual RIAs will have to obtain a new ARN to offer this service. In addition, their clients (existing and new) can decide if they want distribution services or fee based services from an RIA. Simply put, RIAs cannot offer both the services – advisory and distribution to a client or a family. SEBI defines family as group of clients. That means, RIAs cannot charge a fee for financial advice from father and offer execution services to his son. Also, RIAs offering advisory services will have to recommend direct plans only. So far, many distributors fear that their existing clients would not prefer paying fee to them for financial advice if they migrate to fee based model. This new proposal, if it goes through, resolves this issue as they can charge fee from new clients and continue to offer distribution services to their existing clients. The new proposal on client segmentation based on distribution and advisory and introduction of execution services would create a level playing field between individual RIAs and corporate RIAs. Another key proposal is putting a cap on fee. RIAs can charge up to 2.5% on assets under advisory (AUA) as advisory fee and offer fixed fee of Rs.75000 per annum irrespective of ticket size. Also, RIAs can charge up to half-yearly fee as advance fee. Flat fee model is not viable for advisors. A flat fee of Rs.75,000 per annum is not viable for RIAs. Hence, most RIAs would opt for ‘percentage of AUA’ model. While a cap of 2.5% on AUA is more than sufficient for RIAs, flat fee option is clearly not viable. In addition, SEBI has proposed that we can only receive advance fees of up to 2 quarters. However, the market regulator is silent on collecting the remaining fee after six months.

SEBI has proposed net worth requirement of Rs.10 lakh for individual RIAs and Rs.50 lakh for corporate RIAs. Existing RIAs have three years to comply with this net worth requirement. In addition, individual RIAs having Rs.40 crore AUA or more than 150 clients have to compulsorily re-register as corporate RIA within six months of achieving this scale of business. This means, they will have to increase their net worth from Rs.10 lakh to Rs.50 lakh. Maintaining such a high capital adequacy requirement will be difficult for boutique advisory firms. Clients will have to enter into an agreement to receive services of RIAs. Such a document should seek clients’consent on fee structure and mechanism for charging fees, validity of advice and so on. RIAs will have to appoint a nominee in case of death or disability. Para planners of RIAs have to be well qualified and experienced. Maintain records such as physical record written and signed by client, telephone recording, email from registered email, record of SMS and so on. RIAs will have to complete the compliance audit within three months from the end of each financial year.

As we enter 2020, we expect participation of retail investors in mutual funds to continue to grow, valuations of mid-cap and small-cap stocks to see an uptick and a gradual recovery in GDP growth. With traditional banking deposits losing sheen to new financial investments (bank deposit share in household saving has come down from 68.9% in FY12 to 53.4% in FY18), there is a huge scope for debt MFs to grow.

Monday, January 20, 2020

January 2020

NFOs of various hues adorn the January 2020 NFONEST.
Tata Quant Fund
Opens: January 3, 2020
Closes: January 17, 2020
Tata Mutual Fund has launched a new fund named as Tata Quant Fund, an open ended equity scheme following quant based investing theme. The investment objective of the scheme is to generate medium to long-term capital appreciation by investing in equity and equity related instruments selected based on a quantitative model (Quant Model). The scheme would allocate 80%-100% of assets in equity and equity related instruments with medium to high risk profile and invest up to 20% of assets to debt and money market instruments with low to medium risk profile and up to 10% of assets to units issued by REITs & InvITs with medium to high risk profile. Benchmark Index for the scheme is S&P BSE 200 TRI. The fund manager of the scheme is Sailesh Jain.

ICICI Prudential Midcap 150 ETF
Opens: January 15, 2020
Closes: January 20, 2020
ICICI Prudential Mutual Fund has launched ICICI Prudential Midcap 150 ETF. It is an open ended Exchange Traded Fund tracking Nifty Midcap 150 Index. The investment objective of the scheme is to provide returns before expenses that closely correspond to the total return of the underlying index, subject to tracking errors. The performance of the fund will be benchmarked against Nifty Midcap 150 TRI. The fund will be managed by Mr. Kayzad Eghlim.

Mirrae Asset Nifty Next 50 ETF (MANXT50ETF)
Opens: January 13, 2020
Closes: January 21, 2020
Mirae Asset Mutual Fund has launched the Mirae Asset Nifty Next 50 ETF (MANXT50ETF), an open ended scheme replicating/tracking Nifty Next 50 Total Return Index. The investment objective of the scheme is to generate returns, before expenses, that are commensurate with the performance of the Nifty Next 50 Total Return Index, subject to tracking error. The scheme’s performance will be benchmarked against Nifty Next 50 TRI (Total Return Index) and its fund manager is Bharti Sawant.

Axis All Seasons Debt Fund of Funds
Opens: January 10, 2020
Closes: January 24, 2020
Axis Mutual Fund has launched a new fund named as Axis All Seasons Debt Fund of Funds, an open ended fund of funds scheme investing in debt oriented mutual fund schemes. The investment objective of the scheme is to generate optimal returns over medium term by investing primarily in debt oriented mutual fund schemes. The scheme will allocate 95% - 100% of assets in units of debt oriented mutual fund schemes with medium risk profile and invest up to 5% of assets in money market instruments with low risk profile. Benchmark Index for the scheme is NIFTY Composite Debt Index. The fund manager of the scheme is R Sivakumar.

HSBC Ultra Short Duration Fund
Opens: January 14, 2020
Closes: January 28, 2020
HSBC Mutual Fund has launched a new fund named as HSBC Ultra Short Duration Fund, an open ended ultra-short term debt scheme investing in instruments such that the Macaulay Duration of the portfolio is between 3 months to 6 months. The investment objective of the scheme is to provide liquidity and generate reasonable returns with low volatility through investment in a portfolio comprising of debt and money market instruments. The scheme would allocate up to 100% of assets in Debt, Money Market instruments such that Macaulay duration of the portfolio is between 3 months to 6 months with low to medium risk profile. The performance of the Scheme/Plan(s) will be benchmarked with CRISIL Ultra Short Term Debt Index. The fund manager of the scheme is Kapil Punjabi.

Sundaram Arbitrage Fund
Opens: January 16, 2020
Closes: January 30, 2020
Sundaram Mutual Fund has launched the Sundaram Arbitrage Fund. It is an open ended scheme investing in arbitrage opportunities. The investment objective of the scheme is to generate income with minimal volatility by investing in equity, arbitrage strategies which fully offset the equity exposure and investments in debt instruments. The performance of the fund will be benchmarked against NIFTY 50 Arbitrage Index. The fund will be managed by Mr. S Bharath and Mr Rohit Seksaria.

Nippon India Multi Asset Fund, Nippon India Freedom FOF, JM Nifty Bank Index Fund, JM Credit Risk Fund, JM Nifty Midcap 100 Index Fund, JM Nifty Smallcap 100 Index Fund, BOI AXA Mutual Fund, PGIM India Mutual Fund, Kotak Nifty Next 50 Index Fund, Nippon India Nifty Midcap 150 Index Fund, Nippon India Nifty Smallcap 250 Fund, Nippon India ETF Nifty IT and UTI Small Cap Fund are expected to be launched in the coming months.

Monday, January 13, 2020

January 2020

The consistent performance of four funds in the January 2019 GEMGAZE is reflected in those funds holding on to their esteemed position of GEM in the January 2020 GEMGAZE. Tata Hybrid Fund, in view of its lacklustre performance, has been shown the exit door.
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 44,497 crore. The fund, managed by Prashant Jain, widely regarded as one of the most competent money managers, has delivered an annualised return of 18.01% since its inception. HDFC Balanced Advantage Fund, with its long-standing stellar track record of delivering 11.73% compounded annually over the last 10 years, towers over the category average of 9.25% annually over the same period. Over a three- and five-year horizon, the fund returned an annualised return of 8.56% and 7.49%, respectively as against the category average returns of 8.19% and 7.09%, respectively, over the same period. The fund earned a return of 4.92% in the past one year as against the category average of 7.55%. But in the past 3 months the returns have been 6.17% as against the category average of 4.19%. The allocation to a single stock has been capped at around 9.37%, with the highest currently allocated to SBI Bank. There are 69 stocks in the portfolio and the top three sectors are finance, energy, and construction, which constitute 57.19% of the portfolio. The portfolio turnover is 11.38% and it has an expense ratio of 1.81%. 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 8.34% over the past one year as against the category average of 8.67%. The three-year and five-year returns are more than the category average of 9.11% and 7.75%, respectively at 9.36% and 8.97%, respectively. The fund has 72.3% of its portfolio invested in equity comprising 91 stocks. This Rs 23,501 crore fund has 39.92% of the portfolio in the top three sectors finance, energy and metals. The fund has traditionally featured a high equity allocation, hovering at well over 70%, and it continues to maintain it at 72.3% of the portfolio. In terms of style, the fund follows a blend of growth and value styles. 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 1.71%. 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.

Nippon India Equity Hybrid Fund (erstwhile Reliance Regular Savings Fund renamed as Reliance Equity Hybrid Fund)   Gem
Nippon India Equity Hybrid Fund is an equity-oriented balanced fund with 73% of the assets in equity. The one-year return of this Rs 8,335 crore fund is 4.03% as against the category average of 8.84%. The fund returned 8.06% and 7.45% respectively, as against the category average of 8.91% and 7.77% during a three- and five-year period. 51.93% of the portfolio is in the top three sectors, finance, construction and energy. The fund has a very compact portfolio of 51 stocks. The fund is benchmarked against CRISIL Hybrid 35+65 Aggressive. The expense ratio of the fund is 1.82%. 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 12.58% as against the category average of 8.84%. The fund’s three-year and five-year returns of 11.78% and 9.24% respectively are higher than the category average of 8.91% and 7.77% respectively. Canara Robeco Equity Hybrid Fund has 49 stocks in the portfolio. 38.12% of the portfolio is in the top three sectors, concentrated in finance, technology and energy 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 2,824 crore fund is 2.05% with a portfolio turnover ratio of 165%. The fund is managed by Mr. Avnish Jain, Mr Shridatta Bhandwaldar and Mr. Cheenu Gupta.

Monday, January 06, 2020

January 2020

Balanced Funds…

Balanced or hybrid mutual funds are a one-stop investment option offering exposure to both equity and debt segments. The main intention of hybrid funds is to balance the ratio of risk-reward and optimising the return on investment. Top hybrid mutual funds invest about 50% to 70% of the portfolio in equities and the rest in debt instruments. Hybrid funds or balanced funds entail the combination of equity and debt in a single mutual fund portfolio. Hybrid funds come in different combinations of equity and debt. Equity and debt funds represent two extremes of the investment spectrum. The actual needs of investors lie somewhere in between. The answer in most cases is to buy equity and debt funds in the required proportion. But that is easier said than done. It calls for retail investors to understand and evaluate equity funds and debt funds in detail so as to make an informed decision. A mid-way solution could be the Hybrid Funds. These funds combine equity and debt either in pre-determined proportions or in dynamic proportions and then offer it as a readymade product for the investors. As an investor you have a wide choice before you with hybrid funds.

The classes…

There are two ways of classifying the hybrid funds. Hybrid funds can either be classified on the basis of the asset mix or on the basis of the discretion available to the fund manager. 

Let us first look at hybrid fund categories from the point of view of the asset mix.

  • ·      Hybrid funds that are predominantly equity Hybrids. These funds invest more than 65% of their asset allocation in equities and the balance in debt. This ratio can vary but typically, the fund manager will not allow the equity proportion to go below the 65% mark. That is because, 65% exposure to equity is the bare minimum requirement for a fund to be classified as an equity fund for tax purposes. Once a hybrid fund is classified as an equity fund due to exposure to equity above 65%, then dividends and capital gains are taxed at a concessional rate. That substantially improves the post-tax yields.
  • ·         Debt Hybrids like a Monthly Income Plan (MIP) is a classic example. Here the predominant exposure is in debt. So an MIP will have around 75-80% in quality debt paper and the balance will be invested in equities. For tax purposes, the MIP will be classified as a non-equity fund but the small equity exposure enables the company to earn Alpha. Being predominantly debt oriented, the MIPs are also very useful for retirees who can afford to take slightly higher risk on their investments for higher returns.
  • ·         Hybrid funds can also be in the form of arbitrage funds. In arbitrage funds, the fund manager buys a portfolio of equities and sells equivalent futures against that. The spread is the profit and it is like earning interest. The returns on these arbitrage funds vary from 6-8% per annum depending on the spreads in the market. Since futures are leveraged products, these funds are classified as equity funds due to predominant exposure in equities and get preferential tax treatment. This makes them more attractive compared to other fixed income instruments.

Hybrid funds can also be classified based on the discretion to the fund manager on asset allocation.

  • ·      Hybrid funds or balanced funds can be static allocation funds where the mix between equity and debt is broadly fixed in a range. The fund manager normally does not go outside these limits. These are the most common type of hybrid funds in India.
  • ·       There are also dynamic allocation hybrid funds where the equity/debt mix can widely be changed. It can even move from a predominantly equity to predominantly debt fund and vice versa. Such shifts are either based on the discretion and outlook of the fund manager or based on lifestyle goals. That is why dynamic allocation plans are quite popular when it comes to long term planning like retirement, children’s education etc.

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

  • Conservative hybrid – these schemes invest around 75-90% of total assets in debt instruments and 10-25% in equity instruments
  • Balanced hybrid – These schemes cannot invest in any arbitrage fund and mostly invests around 50-60% in either debt/equity related instruments
  • Aggressive hybrid – The composition of these funds includes investments of around 65-85% of total assets in equity related instruments and the remaining in debt instruments.
  • Dynamic asset Allocation – these are also known as balanced advantage funds. As the name says, the composition of investments in debt and equity instruments varies dynamically.
  • Multi asset allocation – 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 follows arbitrage strategy and invests at least 65% of total assets in equity related instruments.
  • Equity savings funds – Open ended scheme investing in equity – minimum 65% of total assets, debt – minimum 10% of the total assets. They also mention about the least hedged and unhedged investments in the scheme information document.

The pros…

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.
Diversifying Portfolio - Balanced funds allow investors to diversify their portfolio as they invest in a variety of instruments like equities and bonds.
Re-balancing- Sometimes equity markets are overvalued relative to debt markets and vice versa. In such a situation, the fund manager should be given the freedom to move between the two asset classes. This leeway is given in balanced mutual funds.
Risk factor is negotiable - You can determine the amount of risk you want to bear in case of hybrid funds. Risk takers can opt for the best hybrid mutual fund, which is equity-oriented. On the other hand, people who require stability are best suited for debt-oriented mutual funds.
Yield Good Returns - Balanced funds will yield sizeable returns owing to the fact that they invest a major portion in equities.
Stability of Returns - The main reason behind creation of these funds is to provide stability to investors. While equity poses a high risk on the total investment due to unstable dividends, debt instruments help compensate for it by providing steady returns.
Inflation 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.
Tax Efficiency - Balanced Mutual Funds which have more than 65% in equity are taxed as equity funds. This means that for holding periods of less than 1 year, gains in balanced funds are taxed at 15% (Short Term Capital Gains Tax).
For holding periods of more than 1 year, gains in balanced funds over Rs 1 lakh are taxed at 10% (Long Term Capital Gains Tax). Gains up to Rs 1 lakh are exempt.
Dividends on Balanced Mutual Funds face a Dividend Distribution Tax (DDT) of 10%. This tax is cut by the AMC at the time of distributing dividends and hence the dividend is tax-free in the hands of the investor.


…and the cons

On the downside, the fund controls the asset allocation, not you—and that might not always match with the optimal tax-planning moves. For example, many investors prefer to keep income-producing securities in tax-advantaged accounts, and growth stocks in taxable ones, but you cannot separate the two in a balanced fund. You cannot use a bond laddering strategy— buying bonds with staggered maturity dates—to adjust cash flows and repayment of principal according to your financial situation.

The characteristic allocation of a balanced fund—usually 65% equities, 35%  debt—may not always suit you, as your investment goals, needs, or preferences change over time. And some professionals fear that balanced funds play it too safe, avoiding international or outside-the--mainstream market, hobbling their returns.



There are 33 schemes under the aggressive hybrid funds category, allocating 65-80 per cent of their total assets to equities, while the rest is invested in debt and money market instruments. During market rallies, many schemes under this category increase their allocations to equity to more than 80 per cent which helps them deliver higher returns similar to that of equity-oriented schemes. In the equity portion, most of the schemes follow a multi-cap approach, though there is a tilt towards large-cap stocks. The schemes try to capitalise from both accrual and duration opportunities by investing in money market instruments, PSU and corporate bonds and G-Secs. NAVs of 14 out of the 33 schemes under the category were hit by the bond-rating downgrades and defaults in the recent bonds fiasco. Performance of these funds depends on how they fare during various cycles of equity and debt markets. Five-year rolling returns data calculated from the past seven years’ NAV history show that the top-10 performing funds under this category have delivered 15 per cent CAGR, which was higher than that of the Nifty 50 TRI (12.7 per cent).

Currently, 21 funds are under the category of balanced advantage or dynamic asset allocation funds, dynamically allocating between equity and debt based on equity-market conditions. Though this category was introduced post the re-categorisation of mutual funds in mid-2018, seven funds, including ICICI Prudential Balanced Advantage and Aditya Birla Sun Life Balanced Advantage, have been following this strategy for more than six years. The equity portion of the portfolio is always maintained at above 65 per cent. Hence, they are treated as equity funds for tax purposes. Most of these funds follow a hedging strategy by taking equity derivative positions when the equity market valuation appears high. This helps limit the downside while maintaining the equity allocation at above 65 per cent. The allocation to equity shares (unhedged) is 30-80 per cent in most funds. The debt portion is managed with a blend of accrual strategy and duration play. In the risk-return pyramid, the balanced advantage category is placed between aggressive hybrid and equity savings funds. One cannot compare balanced advantage funds with aggressive hybrid funds as the latter allocates 65-80 per cent to equity (unhedged). Hence, the participation of balanced advantage funds in equity rallies is limited. Performance, as measured by five-year rolling returns, shows that the top-five performing funds under this category have delivered 12.5 per cent CAGR over the past seven-year period, which was almost similar to that of the Nifty 50 TRI (12.7 per cent).

Balanced mutual funds have offered better risk-adjusted returns in the long run compared to equity returns. The 5-year rolling return and standard deviation of balanced funds are 13.2% and 2.9 respectively as against 12.90% and 3.47, 13.96% and 3.82 and 14.91% and 3.96 for large-cap funds, mid-cap and large cap funds and diversified funds respectively.


How to select a balanced advantage fund wisely?

Quantitative Parameters

1.      Performance and risk analysis
This is to analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns.
Under this, the fund needs to be ranked on quantitative parameters like rolling returns across short-term and long-term periods, such as 1-year, 3-year, and 5-year as well as on risk-reward ratios like Sharpe Ratio, Sortino Ratio and Standard Deviation over a 3-year period.
2.      Performance across market cycles
You need to ensure that the fund has the ability to perform consistently across multiple market cycles. Therefore, compare the performance of the schemes vis-a-vis their benchmark index across bull phases and bear market phases.
A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters

1.      Portfolio Quality

Adequate Diversification - The scheme should not hold a highly concentrated portfolio. The portfolio should be well-diversified and the exposure to the top-10 holdings should be ideally under 50%.
Credit Quality - For debt component, you need to ensure that the fund does not hold a high proportion of low-rated (securities rated AA or below) or unrated debt instruments. A fund with a higher credit quality should be ranked higher.
Low Churn - Engaging in high churning can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.

2.      Quality of Fund Management

You also need to consider the fund manager's experience, his workload, and the consistency of the fund house. Therefore, assess the following:
The fund manager's work experience:   He/she should have a decent experience in investment research and fund management, ideally over a decade. But note that experience is not always enough. Some schemes managed by fund managers with 15-20 years of experience have not necessarily done consistently well for a long time.
The number of schemes managed:   A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.
The efficiency of the fund house in managing your money:   Do your research about the fund house's consistent performance across schemes. Find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication that their investment processes and risk management techniques are sound and efficient.

Apt for…

Balanced funds can be considered by the following kind of investors:

New investors: For investors who are putting their money into mutual funds for the very first time, both equity and debt instruments are balanced in their portfolio, thereby ensuring that investors can watch their investment record reasonable growth whilst keeping their principal investment amount protected. A young investor who is having a predominant exposure to equity funds can diversify risk by investing in hybrid funds. This introduces debt gradually or in the proportion required. Equity hybrid funds or MIPs can be chosen as the case may be.

Conservative investors: Balanced funds are great options for conservative investors like retired people and those who want a long-term safe haven investment instrument. The reason why a large number of such investors consider balanced funds is due to the fact that they follow a balanced strategy which enables them to get the best possible outcome regardless of whether or not bond or equities markets are affected.

Investors who want better returns than investments in debt funds: Debt funds tend to provide returns of around 10% on average, but some investors do not mind taking on some additional risk, albeit marginal, to earn considerably higher returns. If you are one of these investors, balanced funds can work out to be very profitable.

Investors who want tax efficiency with stability: Investors who are looking at tax efficiency with stability can also opt for hybrid funds. Under the hybrid category, equity hybrid funds with 65% plus to equity or arbitrage funds are treated as equity funds for tax purposes. You can use these funds to get more tax efficient returns.

The right fund for you?

Balanced Funds are the most convenient investment instruments for the investors who want to gain good earnings on mutual funds, but do not wish to take the risk of stock market fluctuations. The equity-oriented balanced fund offer capital growth in the medium to long run, while the debt-oriented fund aims to generate steady risk-adjusted returns. Thus, the investors can gain substantial income on their investments.