The Mutual Fund Show: Schemes That Help Reduce Risk Of Investing In Equities
As Indian benchmarks scale newer highs by the day, investors can seek mutual funds that invest in various asset classes to minimise risk. Balanced advantage funds and multi-asset funds are two such options.
Balanced advantage funds, also known as dynamic asset allocation funds, are a category of hybrid mutual fund schemes that invest in equity and debt and keep modifying their asset allocation based on market valuations. Since they’re classified as equity funds by the market regulator, they’ll have 65% of their investments in equities and related instruments.
The advantage of such funds, according to Raghav Iyengar, chief business officer of Axis Mutual Fund, is their managers can reduce what’s known as the “unhedged equity”. They’re ideal for conservative investors who don’t want to put all their money into equity at a particular time but also want to enjoy experience of an equity investment, he said.
“Let’s say if markets are very high, as people are feeling they’re today, the portfolio model shows out you have to reduce your equity exposure; the equity exposure is brought down to about 44-45% and then 20% is put into arbitrage funds so the total becomes 65%,” he said on BloombergQuint’s weekly series The Mutual Fund Show. “The remaining 35% is put in debt.”
Multi-asset funds are typically open-ended schemes investing in equities and related instruments; debt and money market instruments; and those related to gold.
Iyengar said such funds give investors a “rounded exposure over the long term”, and are useful for those can't make calls on asset allocation themselves. To achieve this, such schemes, he said, put capital in a set of assets that are negatively correlated—or don't move in tandem with each other.
Santosh Joseph, founder and managing partner of Germinate Investor Services LLP, said these two schemes are “categories of the future”, as they answer two critical questions for the investor: “Can I stay invested irrespective of the good times or the bad times in the markets?” and “Can I stay invested irrespective of the market movements?”
Multi-asset schemes will “blossom into a big category” as it will witness massive inflows in the coming days and years ahead, he said. “The act of booking profits out from equities at highs and parking that money into debt, and vice versa when equities correct, will result in a pleasant investing experience for an investor, enabling her or him to stay invested for a long time and create wealth.”
For the multi-asset category, Joseph recommended funds from HDFC, Motilal Oswal, Nippon India AMC, ICICI Prudential and Axis, and in the balanced advantage segment, he suggested funds from Axis AMC, DSP Mutual Fund, IDFC Mutual Fund and Edelweiss AMC.
Watch the full interview here:
Raghav, we decided last time that we will do the six categories of hybrids with over a period of three episodes... we start off with Balanced Advantage Funds?
RAGHAV IYENGAR: Balanced Advantage Funds are the flavour of the day, so let's go for that because that's one of my favourite stones too.
Why so? What is this category about? Can you give us a brief primer?
RAGHAV IYENGAR: If you remember, we talked about SEBI, the regulator coming up with a set of subcategories within mutual funds, like large cap, mid cap, small cap, recently multi cap, flexi cap, etc. So, in the hybrid space, this is the most recent addition. In the sense, this category frankly did not exist and came into life during the formal categorisation there and it happened. As the name suggests, there are two names to it, the generic name is balanced advantage or dynamic equity. In some sense if you remember we spoke about hybrids, so hybrids are nothing but a mix of equity funds investments they put into the same scheme in varying proportions.
In balanced advantage, by its nature an equity fund, which is that at all points of time, it will have 65% plus in equity and equity-related instruments. What's the unique thing about this category is that the fund manager or the portfolio manager of the fund house has the ability to reduce what is called the ‘unhedged equity’, which is what we call the open equity.
If you remember last time we spoke about arbitrage, so let’s say if markets are very high, as people are feeling they are today, the portfolio model shows out that you have to reduce your equity exposure, the equity exposure is brought down to about 44-45% and the 20% is put into arbitrage funds so the total becomes 65%. Then you have the difference between 65 and 100 which is kept in debt. If you remember, why do people do all this? For two reasons one is the beauty of the hybrid categories is, that it has two different asset classes, equity and debt, they tend to sort of move in different directions at different points of time. So, it is ideal for somebody like a conservative investor who does not want to put all his money into equity at a particular time but at the same time wants to enjoy the experience of an equity investment. So, in some sense it's a great category in today's time because most of the people I speak to today, it is a worrying bull market. So, whether you talk to senior portfolio managers or you talk to research analysts or you talk to the man on the street, everyone's got that standard question that, oh it’s 60,000 now, what to do? Is it time to take out? Is it time to put in? What shall we do? They want to put in money but at the same time they are a little worried about the market fall. So, in that sense this category of funds or this balanced advantage category in that sense is a perfect place for people who want to do that.
How would the categorisation or how would the differences be? In order for a balanced advantage fund to have taxation of 65%, naturally 65% has to be in equities at all time, which will be in equity and arbitrage, both?
RAGHAV IYENGAR: Absolutely, that's the thing. So, the beauty in balanced advantage funds is that most fund managers or most fund houses have models to figure out where their equity allocation is, and these are what I call procyclical or what is counter cyclical. Now, this is more complicated but essentially a procyclical view is something like a momentum-based view, that is you see the trend of the market and a counter cyclical views when you look at valuations in the market. So obviously, the natural theory applies that when valuations are high, obviously people want to bring equity exposure down, you bring down the total exposure but at the same time you top it up by adding some arbitrage to keep the entire 65%. Now that's exactly the trend and if you look at the trend and therefore there come these lovely boxes. If you see the market valuation is low, but the trend is unfavourable typically this is where equity managers are there but if you look at the extreme right hand corner, that's favourable for equity. Say sometime last year, maybe sometime let's say April, May, June, just around the time after the Covid bomb hit us, you want that market valuations were low, but if you find that the trend is unfavourable like it was maybe in the first couple of months of post-Covid, then obviously our equity allocation is less. So, fund managers or fund houses tend to use a mix of these two styles to try and figure out where their equity allocation should be, and then obviously the balance which is 65 minus that allocation is put into arbitrage, and of course then the remaining part is put into debt. Some fund managers even go up to 75-80% in equity. Today, like our Axis Balanced Advantage Fund can go technically from 0 to 100 too. In that sense it gives a lot of freedom to the fund manager to decide on where his equity allocation should be depending on market valuation. So, why is this category so popular because ideally today it sort of fulfils that one big question that hey, what do I do when the market is high, and we all know that ultimately asset allocation is a very fundamental way of trying to get a better investor experience, that's what the whole hybrid category does. In this particular category because you can go all the way from let's say 30% or in some cases even 0 to all the way to 100, in some sense you are delegating that responsibility to a fund manager, based on a particular model and that experience should be better. Most of the times as retail investors you tend to sort of buy high, sell low and actually the converse should happen, you should actually buy low, sell high, but that has something to do with behaviour. So, typically very few people are able to sort of come back. Many investors actually came into markets and that is a beauty between April, May, June last year. That is the data talking if you go to AMFI website you will see that the industry got pretty strong flows in that period of time, but many people jumped off the train, somewhere around this time, August, September, October, November. September, October, November, actually, the redemption sort of took off because everybody had this perception that hey, the markets are at whatever, they've almost given a 30-40% returns at the place where they invested and they really envisage it going further up but you know what happened after that. In the last one year also the index is up very smartly and there are a whole host of reasons to that. So, that's the discipline part of it and for many investors that discipline is difficult to practice. Apart from the fact that we all lead busy lives and it's difficult for us to sort of get there and do it on a regular basis. I think very few investors are able to see it. So, you see that the category is actually very large. It's almost 1,50,000 crore in fact in the last two months, the maximum amount of money has actually come into this category. So, in some sense, the Indian investor, thanks to channels like yours and thanks to articles, two things that we're doing today because I think the education levels are so good. People are very interested in trying to figure out what their funds are doing or what people are doing with their money that they're able to actually get into these products maybe whenever markets are high. So, that is what I have noticed in my experience, that's ever since this category has come in that when market valuations tend to get a little higher and obviously the headline index numbers are much higher than what people think they should be, this category sees a huge amount of money. So, in that sense it's the youngest category but it is in the entire hybrid space, it is the number one AUM category.
The remaining is 35% split between?
RAGHAV IYENGAR: In this fund, it just goes to debt. The next fund that we're going to be talking about, which is triple advantage or multi asset funds as we call it, there is an element of debt plus equity plus a third and a fourth asset class. So, that sometimes can be gold or REIT. So, that's a fundamental difference between the two categories, in that sense they are similar, but largely in terms of equity valuation, the multi asset largely stays pretty much anchored at the higher ranges of equity, it's not as dynamically managed as the balanced advantage fund.
Over a period would the returns for dynamic auto balance advantage fund be much better than say a pure equity fund or nothing like that? The reason why I ask is, some people will say, equities will always score over a period of time but however there will be others who will say that if you are able to manage the high and the low equity exposure very well, then typically the returns could actually be higher because 65% is the minimum, you can go higher as well on the equity allocation.
RAGHAV IYENGAR: Yes, it can go ahead and go up to 80%. I think the fact is that returns come out of two parts one is obviously the entire asset allocation process. The other part is obviously the entire stock selection and the way you look at equity. So, it's unfair to compare both of them but yeah, I would look at this fund is for the amount of risk you're taking I think your risk adjusted return as compared to a pure equity fund will be much better, because of the fact that you're able to adjust the equity levels depending on market conditions. I have one last point, which I’d like to make on this category which is my standard one which I use for all hybrid funds and more specifically for this one, because of the facts. When we spoke, we spoke about the various categorisations that let us say, large-cap funds have to have a minimum percentage in large-cap stocks and mid-cap funds should have a minimum percentage in mid-cap stocks. In a balanced fund or actually in any hybrid category that choice, or that ability is there with the fund house. So, I can potentially have much higher levels of small-cap or mid-cap or large-cap in my fund, unlike it being determined by other things and the same thing can happen in fixed income, too. So as you know fixed income, you can buy AAA assets you can buy AA assets or you can buy one year assets or you can buy 10 year asset. Now, most of the fixed income categories have some fixed income restriction around them. So let's say in a short-term bond fund you cannot have a duration of more than three years, whereas again is the debt portion in the hybrid fund and specifically in balanced advantage funds, because you're allowed that discretion, one needs to be a bit careful how one selects a fund because most of us or most of the people what they do is they go and research, they do a top-down search and they say who's the one who's giving the best returns over a one year, or three or five year period that's great but in this category, what you really need to figure out is that how has that fund done when markets have actually gone down because the guy or the investor who's coming into this fund, is somebody who is a conservative investor, he is not looking to get 100 on 100 out of his equity. He or she wants to participate in equity, at the same time not take that complete risk, so please remember this, don't do this top-down stuff which most of us tend to do and go into various places and just check out a one-year return and how is the last six months return. Anyway, one should not do that because the fact of life is, past returns are never indicative of how the future is going to be that's much more complicated, but in this particular category one needs to be that much more careful because every fund house has their own model, every fund house has their own style of putting equity or debt and some people put a lot of focus to buy more large cap, that may be somebody who may not know that and if let's say hypothetically large cap doesn't do well in the last six months, it will look like a failure strategy.
The key thing that you must understand is that how has the fund done or how has the scheme done when the markets are down and that's actually where you should put more emphasis on.
What is the difference between the multi-asset category and balanced advantage funds?
RAGHAV IYENGAR: So multi-asset is a beautiful category, it's actually a go-anywhere category if you want to ask me because you can literally have gold, you can have equity. So, as the name rightly suggests and this is something that the regulators really cracked because I think this category used to have all kinds of weird names around it but I think very clearly that it is now very easy to understand. So as the name very clearly suggests I think this is a category which can have many different asset classes by that I mean it could be having gold, it could have equity, it could have debt. Off late, there is a new category called REITs and what we call Investment Trust InvITs, in which these are two new categories that have just emerged, especially in the last five years. There are a lot of issuances, a lot of activity happening around it and I think it's a great story if you were to look at it over a period of time. So, today an asset manager can really build a multi-asset portfolio. Now why do people do this? Why do we complicate it? Same logic which we started off if you remember in the hybrid space that ultimately asset allocation is a very key component of how investor experiences, and if you put in a set of assets which don't move in tandem with each other, typically, like now what's happening, for example, for the last one-year equities have done very well. Gold has done nothing, so it is negative. So, it is a negatively correlated category and when you mix these assets up and then what it tends to do is, it gives you a much longer term, a slightly more conservative investor experience or rather when equity falls debt goes up so vice-versa. So, you mix match these categories, and in that sense, it tends to have a much better experience. Now many people do this on their own, intuitively, you will have equities maybe through a mutual fund or through a direct equity platform, you will have debt through maybe a bank deposit or maybe through other asset classes. Gold is of course a family heirloom in terms of India, but many people buy gold, especially in festive seasons like what is coming to us now and of course off late a lot of retail investors are participating in InvITs and REITs. Then there is property. Many of us have direct property investments now of course there is a different way to do it through the capital market but this fund actually or these types of funds actually put all that into a single fund. So, it's a very interesting asset class and I think as and when more asset classes keep getting added, in the past largely it has been largely gold, equity and debt but off late as I said, investment trusts and real estate investment trusts are the new additions. I think as more and more assets keep getting added this will become a truly unique category.
Suffice to say that the returns out here potentially could still be lower, but it is an all-round investment also, so a person puts everything at one go?
RAGHAV IYENGAR: Absolutely, it's an all-rounder fund point in terms of your total asset allocation. So, somebody says I don't have any of these assets, and I want to have exposure to all these assets, and I want to just invest 5,000 or Rs 10,000 but in Rs 10,000 you will not get any substantial participation in anything. I mean, maybe mutual funds will give it to an equity and debt but if you want to go and buy, like say Rs 10,000 of gold you would hardly get any scrimmage out of that. Real estate in Bombay with Rs 10,000 will not even get you a tile so, if you want to put that and it is by participating in these asset classes with finite and a very small amount.
Is there something that you are doing differently at Axis for this category vis-à-vis some of the other funds in the market out there?
RAGHAV IYENGAR: Axis has a triple advantage fund which actually was one of the first funds in this category a long time back. So we're doing a mix of debt, equity and gold and I think in some sense, we have had a really lovely long term track record and again, as I said when markets get a bit choppy and people are a little confused as to what to do with it and they also want a little bit of gold because there are a lot of traditional investors who like gold and gold is a great defensive asset class especially in times like this when there is so much of money being printed across the world. So, it's a hard asset as they call it so that's where we are. We are actually really talking a lot about our triple advantage fund and if you go back and look at the track record, it's got a stellar track record over the last 10 years, and I think investors especially of the conservative clients are really liking this idea.
We had Axis AMC just before you, talking about two categories within the hybrid structure which is balanced advantage, as well as the multi-asset category. Any quick thoughts that you have here and then we would want to understand from you, which of these practitioners within both of these categories do you admire the most and why but first, a view on for what kind of investors are both of these categories suitable?
SANTOSH JOSEPH: First things first, I heard Raghav speak about it and I think he did a great job in explaining those things. These two categories are the categories of the future. Now you already saw over the last decade, how the balanced advantage many may call it by different names, but this is the hybrid equity category where equity and debt is dynamically managed. It has taken the entire mutual fund flows by stock. Now, we are also going to see the same thing happen in multi-asset, many mutual fund companies either actually have a scheme or they're looking at a scheme or they're reworking on some schemes to manage the multi-asset. Like how you had the balanced advantage or the dynamically managed equity category come right on top as we speak today in terms of flows, in terms of the practicality and the applicability of the product to the larger audience, I believe we are a couple of years in the pipeline to see the multi-asset category blossom into such a big category. Now, while we were speaking about Axis Triple Advantage, I agree they were one of the first ones, almost a decade ago to come with more than two assets in one category which is equity, debt and Gold. Today you have multi-assets which have maybe another one or two additional assets that make the entire mix interesting. Both of them are being able to solve a very critical challenge to the investor which is, can I stay invested irrespective of the market movements? Can I stay invested irrespective of the good times or the bad times in the markets? I think that is the reason why these two categories, one is successful, will continue to be successful, we'll see massive inflows in the coming days and years ahead.
Are they not suitable for example for certain investors and let me qualify my question, let's assume there is an investor who is young, has got many years of say investing life ahead and she can take risk or high risk, is it advisable for such an investor, because she wants higher returns? Is it advisable for such an investor to not opt for these and that's how I'm qualifying this question? So, what kind of investors are these funds not suitable for?
SANTOSH JOSEPH: I think that is the right way of asking that question, I think this is not suitable for people, especially investors who have an absolute clarity of thought in what they want. See you also have to be honest with ourselves that many investors think one thing, do one thing and expect a very different return.
If you're young or old, if you understand equity, you want the right equity exposure, you are okay with the volatility, you're okay with a drawdown, you're also okay when there's a massive upside and you don't feel like selling out and you're going to be a long-term investor, then multi-asset and balanced advantage or dynamically managed equity are not a category for you.
You take the allocation call yourself, you take the call to enter, you take the call to exit with absolute clarity of thought. These two products or categories are for people who were not very sure of their asset allocation, were not confident of taking a call and were not confident of staying through the market cycles or even investing through a market cycle.
Santosh, would you believe that by virtue of the fact that the multi-asset allocation funds now have more than two or three categories attached to themselves and while they give more diversity in asset base, their quantum of returns would on a normalised basis be lower than a pure balanced advantage fund? As an investor if I want diversification, but I don't want excess diversification then would that excess diversification come at the cost of some returns?
SANTOSH JOSEPH: There are two points in this. One, multi assets give you slightly more diversification than you possibly can do yourself two maybe that you want. You will compromise a little bit on the return only on an absolute basis but on a relative basis, you will not. Let me use gold as an example which is possibly the mainstay in multi-assets. If you were to be looking at gold exactly a year ago from where we are today, you had gold at over 20% return. As we speak, the last one-year return on gold is a negative 10 to 12% return. A year ago, you were motivated to invest in gold. Today you're not motivated to invest in gold. Therefore, multi assets removes that risk, ensures that you have a very dynamically managed gold allocation through the cycles. The second part, that why you should look at it in conjunction with the risk you take and the return you get rather than only the absolute quantum of getting maybe two or three percentage points lower, is that we all have a certain finite capacity in taking that mental ability to take. This is what I call mental exhaustion, you may be good when you start off with asset allocation moving between debt, equity, gold, maybe international equities, maybe REITs or maybe actively managing it. Over a period of time, once you get used to your portfolio, we all go through what we call a mental exhaustion, you give up, you slip up. That's when multi assets, stand up for you, that's when actively managed funds will look different and then you will realise it didn't matter whether I made 1 or 2% less, as long as I was still in the game, in the right fashion.
May I urge you if you are at the liberty to not give us an exhaustive list, but maybe two or three names, and not in a definitive order of funds, which you think are good as an investment bet for both the balanced advantage fund category as well as the multi asset category.
SANTOSH JOSEPH: I'll give you two-three names and I will give you the names last but I'll give you the reason why I believe the names are important. When we look at dynamic managed equity that's what I'd like to call it, they're called BAFs. Now, interesting part is, each and every asset management company has got a model that they swear by, and they believe is that it is better than the market. Number one, that leads to a certain equity, debt or arbitrage or the hedged exposure. Number two, that leads to you choosing also some bit of how you manage equities largely, large cap mid cap, small cap. Three it also tells you, are you pro-momentum or against momentum are you contra, or are you just going with the flow of the market. The third and the fourth very important is, how much dependent is this model on a fund manager or on the metrics that you are going to apply. There are some people who will say, listen, I have a model until the model is triggered or breached, I will not touch it. Some will say that I have a model, but my fund manager has a discretion with so and so constraints, some will say no, my fund manager will decide based on how it is. So therefore, why am I going to say these few names is because all of them possibly give you an opportunity to diversify within that category. For example, let's assume that I start with looking at Axis Balanced Advantage Fund. Now I'm comfortable with Axis because they have their model which is working, they were moving from a 40-day trading average into now a flexibility for the fund manager to move. The second option one could consider this maybe a DSP Dynamic Asset Allocation Fund, they have a model. They have a model which has proven in the downtimes and in the up times. Then to add little diversity you move to a HDFC Fund, they've been aggressive. So, through the last one year, I think about a year ago their equity allocation was maybe not of 80 now they may be closer to the 60s odd level. Now, if you look at the two different balanced advantages fund, one being at 35-40, one being at 80, tells you that there is a divergent view in how they're looking at the market and the position it offers for a one year, three year or a four-year standpoint. Then you add let's say an IDFC Balanced Advantage Fund. Now I’d also like to think that at some level, one has to keep in mind, the size of the fund. Right now I'm going for a couple of big ones and a couple of small to medium ones which have the ability to also have the flexibility to maneuver, all these given said paradigms and make that balanced advantage truly a dynamically managed equity fund, which is to reduce risk and optimise the return. Likewise, if we come to multi assets, let's say we start with Axis and then go on to look at who are the other ones who offer this. Look at Nippon, Nippon has got a multi-asset fund which says that I got international equity, I got Indian debt, I got Indian fixed income, I also have gold. The minute you have international equity, you also at some level, get some sort of exposure to even the dollar or the foreign currency. So, it becomes multi-asset with one added level of foreign currency also built into it. Now, similarly you also have Motilal Oswal which gives you a similar multi-asset experience, but there instead of managing equities activity they manage it through an ETF, where you have the Nasdaq, the S&P 500, the Indian actively managed fund and Indian debt fund and gold as well. So HDFC, Motilal, Nippon ICICI, Axis are good bets for multi-asset whereas in the balanced advantage category, you take Axis, you take DSP, you take IDFC, you take HDFC maybe even Edelweiss. They've done phenomenally well and there were the one who followed the pro-momentum call. So, these basic reasons are one that makes me select the fund and sometimes I even ignore how the returns alone play out because what is important is selecting these metrics more than who has performed well over the last one year or two years.