Mutual fund houses are set to classify schemes in standard categories defined by the Securities and Exchange Board of India, such as equity, debt, hybrid and solution-oriented, among others.
Restricting the categories brings simplicity, but it also limits the choice available to an investor, Vishal Kapoor, chief executive officer of IDFC Asset Management Company Ltd., said on BloombergQuint’s weekly series The Mutual Fund Show. “Categorization simplifies the lives of investors as well as advisors.”
Hybrid mutual funds, as the name suggests, is a mix of two or three asset classes, said Harshvardhan Roongta, principal financial advisor at Roongta Securities. Now, there is a category available for each investor type, he said, adding: “For conservative investors there are conservative hybrid funds.”
Here are edited excerpts:
While the categorization of hybrid schemes is lauded, there still exists a large number of schemes for an investor to choose from. Does that defeat the purpose?
Vishal: Not quite. If you were to restrict the categories, it does bring in more simplicity, but it restricts choice as well. So, the question is what’s the right number of categories. The attempt right now is to take largely the existing blocks or buckets of schemes, which are already evolved and group them into something that’s sensible and largely consistent. It can’t be perfect, but it’s largely there. Does it simplify the life or objective of investor as well as advisor who can then measure apple to apple? I think it does that quite well.
Did you get a barrage of questions from your investors too?
Vishal: That depends on the specific fund house. In our case, we were lucky we didn’t have so many funds that needed to be changed or merged. We hardly had any change. We didn’t have a plethora of schemes that had germinated over time. So, it depends on: did you have to change a lot of fundamental attributes or merge schemes or move them into different category or strategy? In our case, there was not much of difference.
Having said that, life does become interesting for the advisor. Because even if there is no change in fundamental attributes, the name may have changed and if you are used to seeing a statement with certain names, the change of name may not be material to you, but it's disruptive. For example, we had a scheme called IDFC Premier Equity which has a new name called IDFC Multi-Cap. So, if you have 10-year-old statement and you have been seeing the Premier Equity and then you see a multi-cap, Harsh would definitely get a call saying that what happened to Premier Equity Fund. It is the same scheme. So, you have to take the customer through it. It's a matter of a few months before you get used to new names.
In the hybrid category, were there many changes among the fund houses or were they lot lesser compared to equity schemes, where the changes has been large as per experts?
Harshvardhan: Let’s understand how simple life has become post this apple to apple comparison and specific categorization has been made. Every fund house has their own definition of large cap, mid cap and small cap. So, every fund house could have their own internal guidelines based on which they will classify a particular company as a mid cap or a large cap. This isn’t the right context to compare two large caps. You can’t compare two mid caps as they have different definitions. In this, they have come out with a list which says these are top 100 companies.
Hybrid is a mix of two or three different assets. That's the combination as how you would've different combinations where you could've 10-20 percent equity going up to 70-80 percent equity or you can have multi asset class. You can have 3 different assets in one particular product. So, this is hybrid. As a category, it's very nice that it is clearly specified to be hybrid. Now when you look at it, they have got it for every investor type. If I am an investor and I say that I want less risk and do not want too much of risk and so I want a hybrid product which is not very aggressive, that is conservative in that nature. So, there is category mentioned that it is conservative hybrid fund. This classification is helping investors, advisors, the distributor fraternity also and it becomes easier for everybody to put all these things in perspective.
What kind of investors you reckon would opt for conservative hybrid fund? What kind of returns one could expect from such category?
Vishal: If you relate this to the old name or the popular category, this used to be largely the monthly income category. A year back, the monthly income funds or plans was a popular category largely for people who are conservative by nature, but do want some amount of equity just as a bit of an inflation hedge. It was very popular with people who are retirees, had a lumpsum, want a stable return but want a small amount of equity to beat inflation.
The name change from monthly income to conservative hybrid is very important because you don’t want to give the impression that somehow there is monthly income guaranteed or certain because this is a mutual fund and it carries a market risk. The name change to conservative hybrid is very appropriate. It is conservative because it has largely fixed income assets. Only 10-25 percent can be equity which is likely it's fixed income product with some equity. Because of allocation it has fixed income taxation, which means you do want to hold it for at least three years for it to be more tax-efficient.
So, it’s great product for conservative people with a bit of equity allocation if you want to beat inflation.
Who is this ideal for?
Harshvardhan: If you look at allocation it’s 40-60 percent, either equity or in debt. This essentially is for individuals looking at asset allocation and importantly automatic re-balancing. So, for instance we have advised someone to have asset allocation of 60 percent in equity and 40 in debt, that allocation needs to be maintained three years from now. When you invested Rs 1 lakh, 60 percent has gone into equity which is Rs 60,000 and 40 percent in debt. After a year, you will see that the valuations will be different. So, equity may have gone up or down or debt may have performed either ways and you need to re-balance it again. So, this exercise is if you are doing it on your own, suppose you have put equity and debt fund, then you have to re-balance it on your own.
If you look at balanced hybrid category, you could have one fund and the fund or scheme itself would do the re-balancing because the mandate is supposed to be that if they are investing 40 percent in debt and equity, they've to re-balance it at every point of time.
So, an investor who looks at asset allocation, but doesn’t want to get into the mode of doing it himself or herself, can look at this option.
The risk profile will be moderate to little high because there is going to be equity exposure to this. So, this could the profile of the investor.
What are the average return expectations for both of these schemes?
Harshvardhan: It has equity component. So, unless you have longer time span, you cannot predict returns.
Let’s say somebody wants to invest for three years. Can you give some ballpark figures about the returns that the person can expect ?
Harshvardhan: It is difficult to give those kinds of figures because of regulatory restrictions. In any case, if you are looking at a hybrid product, you will stay invested for three-five years and beyond. If you are not going to be able to make more than fixed deposits of fixed return instruments and you are not able to make a double figure return, then you are not doing the right thing. You are not taking enough risk to match the exponential returns which you are getting. So, expectation would be that you can get a double figure return like 10-11 percent depending on how the markets have panned out. But it is over a longer period of time. Equity markets in the short term can be extremely volatile.
Watch the entire conversation here: