FUND FULCRUM

January 2016

The country's 44 fund houses together had an average assets under management (AUM) of Rs 11.06 lakh crore at the end of December 2014, compared to Rs 13.39 lakh crore registered in December-end 2015, as per latest data available with Association of Mutual Funds in India (AMFI). Strong participation from retail investors and robust inflow in equity schemes helped the mutual fund industry's asset base soar by 21.1% to Rs 13.4 lakh crore in 2015. The top five fund houses -- HDFC MF, ICICI Prudential MF, Reliance MF, Birla Sunlife MF and UTI MF -- retained their top five positions from last year. HDFC MF continued to hold its numero uno position with an average AUM of Rs 1.78 lakh crore, a surge in asset base by 18.5%, followed by ICICI Prudential MF, which saw its asset base growing by 26% to Rs 1.72 lakh crore. Reliance MF's AUM climbed 24.5% to Rs 1.57 lakh crore, Birla Sunlife MF's assets base went up 26.5% to Rs 1.26 lakh crore and the assets under management of UTI MF increased 21.4% to Rs 1.06 lakh crore. Among others, Kotak Mahindra MF's assets base shot up by 41.5% to Rs 54,902 crore, while that of SBI MF zoomed 38.7% to over Rs 1 lakh crore. The yearly rise in AUM is largely on account of huge inflow in equity and equity-oriented schemes. In addition, retail participation increased significantly during the year. Equity assets crossed the Rs 4 lakh crore mark for the first time in the history of Indian mutual fund industry, signalling the return of domestic investors taking the mutual funds route. The average AUM of long maturity debt funds, including debt and gilt funds, rose 56% in 2015 as a series of repo rate cuts by RBI boosted sentiment. The central bank brought down the key rate by 1.25% over the year to 6.75%, citing lower inflationary pressure and the need to boost the economy. 

Investors have pumped in a whopping Rs 1.62 lakh crore into various mutual fund schemes in the first 9 months of the current fiscal, mainly in equity and money market categories. In contrast, inflows worth Rs 87,942 crore were witnessed in the April-December period of last fiscal. As per the latest data available with the Securities and Exchange Board of India, investors put in a net Rs 1,61,696 crore in mutual fund schemes during April-November period of 2015-16. Investors have put in most of the money in equity and 'liquid' or money market category. Equity and equity linked schemes witnessed an inflow of Rs 69,958, while 'liquid' or money saw an investment of Rs 53,220 crore. Further, balanced funds and income funds registered an inflow of Rs 17,844 crore and Rs 14,697 crore respectively. However, Gold ETFs saw an outflow of Rs 575 crore. The robust inflow has helped mutual funds asset base to reach Rs 13.41 lakh crore at the end of December 2015 from Rs 11.88 lakh crore in March 2015.

Piquant parade

To attract retail investors, mutual fund houses are contemplating "robo" advisory route, wherein automated algorithm-based advice will be provided without human intervention. The move will help in reducing the cost for investing in a mutual fund scheme and eventually attract retail investors. Online wealth management services provide robo advisory in India but such services are still in a nascent stage. However, it has become popular globally. Robo advisors use algorithms to develop an asset allocation plan and help in investment. They also help clients to monitor their savings and deviation in their asset allocations against the target. Several fund houses are considering the idea of robo advisory service to attract retail investors. They help customers make more informed decision on what to buy and how much of an asset type to buy. The platform offers a very simple, user-friendly interface and is quite convenient even for non tech-savy investors.

AMFI has requested the Ministry of Finance to introduce Mutual Fund Linked Retirement Plans (MFLRP) under 80 CCD. Section 80 CCD of the Income Tax Act provides tax benefits over and above the 80 C limit, which is currently Rs.1.5 lakh annually. Investors get tax deduction of up to 10% of salary subject to up to Rs.1 lakh on contribution towards pension funds. This is applicable in National Pension Scheme (NPS) currently. Last year, SEBI had proposed that a long term product like MFLRP with tax incentive can play a significant role in mobilizing household savings into capital markets. Also, in 2013, the draft Budget document had a mention on uniform tax treatment for pension fund and MFLRP. If implemented, fund houses can launch these products by getting approval from SEBI directly. Currently, fund houses need to take approval of Central Board of Direct Tax (CBDT) on a case-to-case basis to provide tax benefits to investors. Many fund houses like Axis, DSP BlackRock, HDFC, Pramerica and SBI have already filed draft offer documents with SEBI to launch Mutual Fund Retirement Linked Pension Plans and are awaiting approval from CBDT. Reliance Mutual Fund has launched its tax saving cum pension scheme called Reliance Retirement Fund after receiving pension fund status from CBDT. The other two funds which had received pension fund status long back are UTI-Retirement Benefit Pension Fund and Franklin India Pension Plan. Both (ELSS and MFLRP) these demands have been pending with the Finance Ministry since a long time now. The mutual fund industry is hoping that their demands will be met in the forthcoming Budget.

After allowing distributors to initiate online transactions through TransactEzz facility last month, MF Utility has extended this facility to investors too. This facility will enable investors to invest in direct plans as well as regular plans from January 1, 2016. Investors were allowed to transact in direct plans through physical mode since the time MF Utility was launched. Now, the only difference is that online transaction facility has been extended to investors. To avail this facility, investors are required to request MF Utility to provide user ID and transaction password. So far, AMCs have been offering online transaction facility in direct plans on their websites. However, investors have to go to each AMC’s website to transact in direct plans. With the launch of MF Utility, all schemes of 25 fund houses will be available at the click of a button. Allowing direct investors in MF Utility has created anxiety among some mutual fund distributors. They fear that their existing clients may start investing in direct plans if this facility is provided in MF Utility. However, merely facilitation of transaction on MF Utility will not lead to a shift to direct plans.

Regulatory Rigmarole

Last month, AMFI had sent a letter to fund houses communicating SEBI’s approval on providing feeds of direct plans to both distributors and RIAs. It has now clarified that AMCs can provide feeds of direct plans only to SEBI Registered Investment Advisers (RIAs) and not mutual fund distributors. In the letter, AMFI has said, “On a review, the AMFI Board felt that the data feed should be provided only to SEBI RIAs who help the investors under direct plan to track their portfolios and not to MF distributors.” Fund houses will have to take prior approval of investors before sharing it with the RIAs. Investors will be required to give their consent in a standard format which is being worked out by AMFI. Also, SEBI has asked fund houses to issue a periodic declaration authorized by the trustees of AMCs that no consideration or brokerage is being paid to RIAs for such a service. Currently, there are just over 357 RIAs in India of which 188 are individuals.

SEBI has allowed fund houses to deploy up to 20% of the net assets of Gold ETFs in the government’s Gold Monetization Scheme (GMS). In a circular, SEBI has said, “As  per  RBI  notification,  the  Gold  Monetization Scheme,  2015 (GMS)  will  replace  the Gold  Deposit  Scheme,  1999  (GDS). However, the deposits outstanding under the GDS will be allowed to run till maturity unless these are withdrawn by the depositors prematurely. Considering the above, in partial modification, it has been decided that GMS will also be designated as a gold related instrument, in line with GDS of Banks. However, the  cumulative  investment  by  Gold  ETF  in  GDS  and  GMS  will  not  exceed  20%  of total AUM of such schemes. All other conditions applicable to investments in GDS of banks will also be applicable to investments by Gold ETFs in GMS.” A few months back, RBI had issued operational guidelines for GMS in which it had allowed mutual funds to invest in GMS offered by banks. GMS enables households and jewelers to keep their gold with banks and earn interest on it. The deposits under this scheme can be made for a short-term period of 1-3 years (with a roll out in multiples of one year); a medium-term period of 5-7 years and a long-term period of 12-15 years. Similar to a fixed deposit, breaking of lock-in period will be allowed in either of the options and there would be a penalty on premature redemption (including part withdrawal). The minimum deposit should be equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under this scheme. The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central Government. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold.

The mutual fund industry has ended the logjam on AMFI’s new commission guidelines. After SEBI Chief U. K. Sinha’s strict warning, all AMCs have started following a uniform commission structure from January 1, 2016. SEBI chief U. K. Sinha had recently warned that the regulator would intervene if AMFI did not come to a consensus on this issue. AMFI, in its board meeting held in December 2015, had directed all AMCs to abide by its new commission guidelines in spirit from January 1, 2016. SEBI had to intervene in this matter as a few AMCs were not adhering to AMFI’s best practices circular on new commission payouts.

SEBI has asked fund houses to give 50% of the two basis points corpus meant for investor awareness programs (IAP) to AMFI. If SEBI’s proposal is accepted by AMCs, AMFI will utilize this corpus to conduct IAPs across the country on its own. SEBI has mandated AMCs to invest two basis points of their assets under management on investor awareness activities. Typically, AMCs take help from independent agencies, distributors and media houses to conduct IAPs. In fact, some AMCs have tied up with regional newspapers to reach out to the hinterland. Last year, at the CII MF Summit, SEBI Chief U.K Sinha had urged AMCs to improve the quality of investor awareness campaigns and utilize the two basis points of AUM set aside for investor education more effectively. Based on the current AUM, AMCs have Rs.260 crore at their disposal to spend on IAPs. AMFI data shows that since beginning i.e. from May 2010 to December 2015, 40 AMCs have conducted 60,270 programs in 485 cities covering over 19.50 lakh participants.

In an irony of sorts, foreign players have begun cashing out in a big way from the Indian mutual fund industry when its total asset base is fast nearing Rs 15-lakh crore mark and fund houses are upbeat about future growth prospects with retail investors joining the party. At the end of year 2015, data showed that total Asset Under Management (AUM) of the mutual fund industry crossed Rs 13.5 lakh crore mark for the first time, while more than 50 lakh new investor accounts were added that year. The performance stands out even better when seen in the context of the equities market not performing so well. The industry is hopeful of trebling its AUM to around Rs 40 lakh crore over the next three years. 

NFO NEST

January 2016

NFOs on a downhill ride

Total money mobilisation through equity mutual funds reduced by 28% during the calendar year 2015. With cap on the upfront commission payout by the Asset Management Companies (AMCs) to distributors imposed from April 2015, there has been a decline in the number of new launches and the assets garnered. There were 63 equity new fund offers (NFOs) in 2015, mobilising assets worth Rs 8,816 crore, compared with mobilisation of Rs 12,219 crore through 75 equity NFOs a year ago. In the first four months of 2015, before the cap on upfront came into existence, nearly 25 close-ended equity schemes hit the market, garnering assets worth Rs 3,600 crore. These schemes were front-loaded with commissions as high as 7-8%. Now the cap is at one per cent upfront, making distributors less enthused about selling new offers to investors. The impact was well felt in the following months as only 12 more close-ended equity schemes were offered in the rest of the year. Gone are the days when NFOs were pushed on the basis of higher commissions. Unless there is something that differentiates an NFO from the existing product basket, offer launches will remain low. With rising awareness, investors prefer schemes with proven track record. This is well reflected in equity schemes inflows, wherein the existing products with a reasonable performance track record of a minimum 3-5 years are accounting for more incremental inflows. In 2015, total net inflow in equity segment was Rs 90,000 crore. However, the NFOs could garner less than 10% of the total fresh money.

Close-ended NFOs continue to adorn the January 2016 NFONEST.

ICICI Prudential Capital Protection Oriented Fund – Series IX

Opens: January 4, 2015

Closes: January 18, 2016

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund - Series IX - 1378 Days Plan D, a close ended capital protection oriented fund. The tenure of the fund is 1195 days. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the plan under the fund. The fund would allocate 70%-100% of assets in debt securities and money market instruments with low to medium risk profile and invest up to 30% of assets in equity and equity related securities with medium to high risk profile. The performance of the fund will be benchmarked against Crisil Composite Bond Fund Index (85%) and Nifty 50 (15%) Index. The fund managers are Vinay Sharma (equity portion), Chandni Gupta and Rahul Goswami (debt portion) and Shalya Shah (For investments in ADR / GDR and other foreign securities).

SBI Dual Advantage Fund – Series XIII

Opens: January 5, 2015

Closes: January 19, 2016

SBI Mutual Fund has unveiled a new fund named as SBI Dual Advantage Fund - Series XIII, a close ended hybrid fund. The tenure of the fund is 1171 days from the date of allotment. The primary investment objective of the fund is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the fund. The secondary objective is to generate capital appreciation by investing a portion of the fund corpus in equity and equity related instruments. The fund will invest 55%-95% of assets in debt and debt related instruments, invest up to 10% of assets in money market instruments with low to medium risk profile and invest 5%-35% of assets in equity and equity related instruments including derivatives with high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Fund Index. Rajeev Radhakrishnan shall manage debt portion and Dharmendra Grover shall manage investments in equity and equity related instruments of the fund.

ICICI Prudential Business Cycle Fund – Series 3

Opens: January 8, 2015

Closes: January 22, 2016

ICICI Prudential Mutual Fund has launched a new fund as ICICI Prudential Business Cycle Fund - Series 3, a close ended equity fund. The tenure of the fund is 1125 days from the date of allotment. The investment objective of the fund is to seek to generate income by investing in a portfolio of fixed income securities/debt instruments maturing on or before the maturity of the fund. The fund will invest 80-100% of its assets in equity and equity related instruments with medium to high risk profile and invest up to 20% of assets in debt, money market instruments and cash with low to medium risk profile. The investment in derivatives can be up to 50% of the Net Asset of the fund. The benchmark Index for the fund is S&P BSE 500 Index. The fund will be jointly managed by Sankaran Naren and Mittul Kalawadia. The investments under ADRs/GDRs and other foreign securities will be managed by Shalya Shah.

Axis Hybrid Fund Series 29

Opens: January 12, 2015

Closes: January 25, 2016

Axis Mutual Fund has launched a new fund named as Axis Hybrid Fund Series 29, a 1275 days close ended debt fund. The primary objective is to generate income by investing in high quality fixed income securities that are maturing on or before the maturity of the fund whilst the secondary objective is to generate capital appreciation by investing in equity and equity related instruments. The fund will allocate 70% to 95% of assets in debt instruments including securitized debt with low to medium risk profile, invest up to 25% of assets in money market instruments with low risk profile and it would allocate 5% to 30% of assets in equity and equity related instruments with high risk profile. Investment in securitized debt would be up to 50% of the net assets of the fund. The fund shall not invest in foreign securitized debt. Benchmark Index for the fund is a combination of Crisil Composite Bond Fund Index (85%) and Nifty 50 Index (15%).The fund managers are Devang Shah and Ashwin Patni.

Sundaram Value Fund Series III

Opens: January 18, 2015

Closes: February 1, 2016

Sundaram Mutual Fund has launched a new fund as Sundaram Value Fund Series III, a close-end equity fund. The investment objective of the fund is to provide capital appreciation by investing in a well-diversified portfolio of stocks through fundamental analysis. The product is suitable for investors who are seeking long term capital growth by investing in a well-diversified portfolio of stocks through fundamental analysis. The benchmark of the fund is S&P BSE 500 Index. The fund managers are S Krishnakumar, Madanagopal Ramu (Co-Fund Manager-Equity) and Dwijendra Srivastava (Fixed Income).

Sundaram Long Term Tax Advantage Fund Series II

Opens: November 3, 2015

Closes: March 15, 2016

Sundaram Mutual Fund has launched a new fund as Sundaram Long Term Tax Advantage Fund -Series II, a 10 year close ended equity linked savings scheme. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The duration of the fund is 10 years from the date of allotment of units. The fund will allocate 80%-100% of assets in equity and equity related securities with high risk profile and invest up to 20% of assets in fixed income and money market securities with low to medium risk profile. The performance of the fund will be benchmarked against S&P BSE 500 Index. The fund will be managed by S. Krishnakumar and Dwjendra Srivastava.

SBI Long Term Advantage Fund Series III

Opens: December 31, 2015

Closes: March 30, 2016

SBI Mutual Fund has launched a new fund as SBI Long Term Advantage Fund - Series III, a 10 year close -ended equity linked savings scheme. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity related instruments of companies along with income tax benefit. The fund will allocate 80-100% of assets in equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies with high risk profile and invest up to 20% of assets in money market instruments with low to medium risk profile. The fund's performance will be benchmarked against S&P BSE 500 Index. The fund will be managed by Dharmendra Grover.

ICICI Prudential Multiple Yield Fund Series II, LIC Nomura MF Short Term Debt Fund, DHFL Pramerica Hybrid Fund – Series 1 to 5, Birla Sunlife Banking ETF, and ICICI Prudential Retirement Income Fund are expected to be launched in the coming months.

GEMGAZE

January 2016 

Balanced funds provide both equity advantage and debt cushion, along with automatic rebalancing, which have placed these funds in a sweet spot. If you are looking for equity-like returns in the long term, balanced funds have proven to deliver superior risk-adjusted returns and, hence, deserve a place in your portfolio. But if you already have an overall portfolio allocation in place, ensure that the fund does not distort the debt-equity equilibrium. Returns within the category itself are quite divergent, so pick a fund that shows consistency in returns and in asset allocation pattern. A fund that makes frequent sharp shifts might be counterproductive. Ultimately, your balanced fund needs to give high returns with low volatility.

All the GEMs from the 2015 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2016 GEMGAZE too. 

HDFC Prudence Fund Gem

HDFC Prudence Fund is the largest fund in the category with assets amounting to Rs 8,586 crore. HDFC Prudence, with its long-standing track record of delivering 15.45% compounded annually over the last 10 years, towers over the category average of 11.34% annually over the same period. Over a three- and five-year period horizon, the fund returned an annualised 14.05% and 11.19%, respectively as against the category average returns of 13.59% and 9.99%, respectively, over the same period. The return of -2.33% in the past one year as against the category average of 1.90% might turn out to be a temporary lull. HDFC Prudence Fund has a diversified quality portfolio with a blend of growth and value and maintains over 70% (75.08% at present) equity allocation before rebalancing. The allocation to a single stock has been capped at around 6%, with the highest currently allocated to State Bank of India. There are 84 stocks in the portfolio and the top three sectors are finance, technology, and automobile, which constitute 33.86% of the portfolio. The portfolio turnover is 33% and it has one of the lowest expense ratios of 2.28% in the category. The fund is managed by Prashant Jain, an outstanding manager, who is at the helm in one of the best AMCs, which follows a robust process.

ICICI Prudential Balanced Fund Gem

ICICI Prudential Balanced Fund has earned a return of -0.8% over the past one year as against the category average of 1.9%. The three-year and five-year returns are also more than the category average of 13.59% and 9.99%, respectively at 16.37% and 14.15%, respectively. The fund has 78.76% of its portfolio invested in equity comprising 43 stocks. This Rs 2569 crore fund has 42.93% of the portfolio in the top three sectors, financial services, energy, and technology. The fund predominantly parks its money in large-caps. But the fund also times its mid-cap investments well, to boost its returns. For example, after a flaccid stock market performance in 2013, the fund was quick to catch on to the ensuing rally and delivered 45%, a good 6 percentage points higher than the category average. It has managed its sector allocation well. To cash in on the 2014 rally the fund increased its exposure in banks and capital goods while trimming its holdings in IT which underperformed the broader market indices. It gradually increased its exposure to long-term government bonds through 2014, raking in good gains from its debt portfolio. It has also managed to cap its losses by making the right calls during rate hike cycles. In the period between March 2010 and October 2011, when the RBI raised interest rates, the fund stayed away from gilts and instead invested in corporate debt, maintaining a low duration. The expense ratio of the fund is 2.38% while the portfolio turnover ratio is 40%. The fund is benchmarked against CRISIL Balanced Index. The fund managers are Yogesh Bhatt, Manish Banthia, and Sankaran Naren.

Tata Balanced Fund   Gem

The tightrope walk between safety and returns that a balanced fund has to perform is not straightforward, but Tata Balanced has consistently done this better than most of its peers. This fund has handsomely outperformed the benchmark as well as the category over the last ten years. Ten year returns have been 16.04%. This compares very well with the category average of 11.34%. The one-year return of this Rs 5381 crore fund is 5.36% as against the category average of 1.9%. Returns of 18.46% and 14.76% respectively, as against the category average of 13.59% and 9.99% during a three- and five-year period, reflects the fund's ability in stock selection. In terms of portfolio construction, equity comprises 74.17% of the portfolio mix, while fixed income securities comprise the rest. 34.11% of the portfolio is in the top three sectors, finance, construction, and healthcare. The fund has 73 stocks in the portfolio. This splintered approach reduces risks as the fund is not too reliant on its individual calls to score well in a rising market. But it can prevent outsize gains in a trending market too. The fixed income portion has high allocations to gilts and AAA-rated corporate bonds. Returns are managed through duration calls rather than credit risk. While most stocks in the portfolio are large-caps, the fund includes a good mix of mid- and small-cap stocks to spice up returns, depending on market conditions. In its debt portfolio, Tata Balanced Fund actively juggles between government securities, certificates of deposits and NCDs. For instance, it neatly rode the Gilt wave in 2014; government securities still account for the most weight at 18% of the portfolio. Corporate debt was on top in 2011 and 2013 when corporate interest rates were higher and bank credit began to wane. With interest rates now trending down, a longer-term debt portfolio bodes well. Debt investments are restricted to high-quality AAA, AA, A1 and A2. The portfolio turnover ratio of the fund is 14% and the expense ratio is 2.27%. The fund is managed by Mr Atul Bhole and Akhil Mittal.

Reliance Regular Savings Equity Fund   Gem

Reliance Regular Savings Equity Fund is an equity-oriented balanced fund with 68.8% in equity. The one-year return of this Rs 1834 crore fund is 5.11% as against the category average of 1.9%. Returns of 15.6% and 11.73% respectively, as against the category average of 13.59% and 9.99% during a three- and five-year period, reflects the fund's ability in stock selection. 37.04% of the portfolio is in the top three sectors, finance, automobile, and technology. The fund has a very compact portfolio of 42 stocks. The fund has a large cap bias with 78% of the portfolio accounted for by large cap companies. In the small and midcap segment, the fund managers try to identify companies with significant price value gap. In terms of sector allocation of the equity portfolio, the fund has a bias for cyclical sectors. The debt portion of the portfolio has a short to medium term maturity profile, keeping in mind the interest rate outlook. 50% of the debt portfolio has maturities of less than 5 years, 23% has maturity of 5 to 7 years, 12% has maturity of 7 to 10 years and the rest has maturities of more than 10 years. The credit quality of the fund portfolio is very high with 99% of the securities rated AAA. The portfolio turnover ratio of the fund is 54% and the expense ratio is 2.64%. The fund is managed by Mr. Amit Tripathi and Mr Sanjay Parekh.

Canara Robeco Balanced Fund Gem

Canara Robeco Balanced Fund is the oldest balanced fund that has exhibited smooth sailing across market cycles. The one-year return of the fund is 3.38% as against the category average of 1.9%. The fund’s three-year and five-year returns of 15.90% and 12.89% respectively are higher than the category average of 13.59% and 9.99% respectively. Canara Robeco Balanced Fund puts in around 74.03% of its portfolio into equities, with 65 stocks in the portfolio. 32.92% of the portfolio is in the top three sectors, concentrated in finance, energy, and construction sectors. The good performance of Canara Robeco Balance 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. Currently, large-caps account for more than 40% of the portfolio. This is not to say that the fund does not take risks for better returns; the share of small and mid-caps in its portfolio has risen from about 20% last August to 33% currently. On its debt investments, which have accounted for a quarter of the portfolio, Canara Robeco plays it safe. The chunk is generally in corporate debentures rated AA or above. Last month, the fund shifted a big portion to government securities, which now form more than half the debt portfolio. The expense ratio of this Rs 460 crore fund is 2.8% with a portfolio turnover ratio of 88%. The fund is managed by Mr. Avnish Jain and Mr Krishna Sanghvi. 

FUND FLAVOUR

January 2016

Balanced Funds – Best of Both Worlds

Choosing between equity and debt is difficult in the best of times. To get over this problem, you must invest on the basis of your age and market conditions. However, if you are among those who do not want the hassle of investing in a basket of products that needs to be rebalanced at regular intervals, you can opt for hybrid funds. Hybrid funds allow you to invest in a combination of equity and debt. The category includes funds with different mandates. Equity hybrid funds, for instance, offer more than 65% exposure to equity, and the rest to debt. Debt hybrid funds invest at least 75% funds in debt and the rest in equity. 

Based on their objectives and strategy, hybrid funds, also called balanced funds, come in three forms - monthly income plans (MIPs), asset allocation funds, and capital protection funds. The main objective of these funds is to offer you the best of both worlds - equity and debt.

Hybrid funds do well when stock markets are going through a difficult phase as they have a cushion of debt. So, they are better equipped to withstand shocks in falling markets. However, when stock markets are rising, they may not do as well as funds with 100% equity component. Rebalancing based on market conditions also works for these funds. Take a balanced fund with 70% exposure to equity and 30% to debt. If the stock market falls, the fund's equity exposure will drop to the extent of the fall, leaving the fund manager with no option but to buy more shares to maintain the 70% equity level. Debt provides safety. Similarly, in a rising market, if the equity allocation moves up to 80%, the fund manager will sell 10% equity portfolio and buy debt, thus automatically booking profits. In fact, the debt component in balanced funds is managed in such a way that short-term debt funds, which are less volatile, comprise a big part of the portfolio. The idea is to lower the risk. Even the fund managers for equity and debt are different. The equity part is managed actively with exposure to companies across sectors and market capitalisation categories. The debt part is managed more passively.

Also in the pack

The other category within hybrid funds is debt-oriented MIPs, which allocate 5-25% funds to equity and the rest to debt. Their performance over the last three years has been noteworthy, with many delivering more than 10% returns. The good performance of these funds can be attributed to falling bond yields in the wake of the downward pressure on interest rates. As bond prices and interest rates are inversely related, the net asset value, or NAV, of any fund's debt component rises when interest rates start falling and vice versa. One can invest in MIPs for consistent returns, not capital appreciation. The idea of investing in these funds is that they give regular payouts. So, choose a fund with a consistent dividend record.

Then there are capital protection funds, a new category of close-ended funds whose aim is to offer consistent returns and protect wealth in a volatile market and yet gain from the upside offered by the equity markets. These funds invest up to 80% in debt (usually with a lock-in of three years), which generates a fixed return and ensures that the principal remains safe. The balance, that is, up to 20%, is invested in equity for wealth generation. However, these funds offer a psychological respite at a high cost. You can create your own capital protection plan by investing in a growth option of, say, an MIP, which has a similar composition of debt and equity, at a lower cost. These funds have low liquidity and tradability. 

These funds are for those who want to invest in the equity market but wish to stay protected on the downside, that is, do not want to risk the principal amount. These funds do not have much of a performance history to boast of, unlike their counterparts. Moreover, they do not guarantee capital. It is something that is stated implicitly; capital protection is inherent in the way the portfolio is constructed.

The right balance

Although equity and debt are more or less known to share an inverse relationship, there have been times when they have been positively correlated, especially when market cycles are turning. In 2003, when the cycle was turning, funds investing in government securities gave double-digit returns just like the equity markets. This went on till 2004. Similarly, after the 2008 global financial crisis, the stock markets picked up after early signs of recovery and debt, too, did well after the Reserve Bank of India cut interest rates to revive the economy. The purpose of investing in a hybrid fund is diversification, which can be achieved if both asset classes bear a low or negative correlation. The ideal investment is a hybrid fund that offers exposure to equity and gold considering they usually have a negative correlation. Gold's low or inverse correlation with other major asset classes like equity and debt can stabilise the fund's risk-return profile during periods of falling equity markets and challenging economic climate. For instance, in the last one year, the domestic equity market has given a negative return of 1%, short-term debt funds have returned 9%, while gold has been an outperformer, delivering 35% returns. There are a number of debt-oriented hybrid funds that offer a combination of equity, debt, and gold, such as Religare MIP Plus, Fidelity Children's Plan, Taurus MIP Advantage, Axis Triple Advantage, Canara Robeco Indigo Fund, and UTI Wealth Builder, an equity oriented hybrid fund.

Balancing act trumps pure debt, equity mutual fund

Despite positive returns from equity markets in the last few months, balanced funds have managed to give strong returns, held their own over debt and even large-cap equity peers last fiscal, riding on interest rate cuts and continued firmness in equities. The latest CRISIL report says that, CRISIL-AMFI Balance Fund Performance Index gave a return of 37.17% in 2014-15 compared with 12.47% by debt (CRISIL-AMFI Debt Fund Performance Index). Balanced funds usually invest in a mix of equity and debt and several funds even have aggressive equity component which can generate extra returns for the investors. Balanced category also outperformed the CRISIL-AMFI Large Cap Fund Performance Index in most time horizons considered. The CRISIL-AMFI Large Cap Fund Performance Index gave a return of 34.61% in 2014-15. The latest CRISIL report also says that, “These funds typically invest over 65% of their corpus in equity and the remaining in debt and cash, which allows them to tap run-ups in either category.” Many financial planners and distributors suggest that beginners start investing in mutual funds through balanced mutual funds as they are less volatile compared to other equity diversified equity schemes. In the last few months, having debt exposure has also helped balanced funds deliver positive returns. “On the debt side, the yield on the 10-year gilt securities fell over 100 basis points last fiscal. A portfolio analysis of CRISIL ranked balanced funds shows funds increased their gilt exposure to 13% on an average last fiscal, compared with 8% in FY14, thereby benefitting from interest rate fall,” concluded the report.

After a strong run in 2014 when top-performing balanced funds delivered upwards of 40% returns, these funds had to make do with a modest 5-6% return in 2015. But then, 2014 was an exceptional year when both equity and bond prices were on a breathless run. In 2015 though, both lost steam and delivered returns in fits and starts.

It is no surprise then that balanced funds have delivered lacklustre returns. The year-to-date returns of the top five balanced funds were almost 7%. But given that bellwethers such as the S&P BSE Sensex and the Nifty 50 registered losses of 5-6%, returns from these hybrid funds have been much higher.

Balanced funds that invest 65-70% in equity, and the rest in bonds and government securities, are less risky than pure equity schemes. So, while equities — particularly large-caps — slipped and impacted returns of diversified equity schemes, the bond portfolio of balanced funds supported performance.

Within equity, balanced funds that have increased their exposure to mid and small-caps have performed better, as Nifty Mid Cap and Small Cap indices managed to deliver positive returns of 5.7% and 4.9%, respectively.

Best bet in volatile times

Balanced funds can offer dual advantage of growth and safety in volatile times. In the present scenario where equity markets have exhibited quite a bit of volatility, balanced funds have emerged an attractive investment option both in terms of returns along with the safety of debt.

A little risk is the safest bet

Balanced funds are tailored for first-time investors and those looking for relative stability for their savings, rather than those eyeing pure equity exposure and high-risk capital accumulation. Shorn of jargon, balanced funds are mixed or hybrid investment schemes that bridge the gap between the riskier equity (or stock) market and the relatively safer debt (or bonds) market. Depending on the nature and objective of investment, as well as the disposition of the investor, balanced funds can come in different shades in between the two extremes. So how much of balanced funds should you have in your investment portfolio? About 20-25% is ideal. Choosing the right fund is imperative. If you are an investor seeking good returns with little tension of market volatility and the associated risks, balanced funds are what the doctor will order.