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WF: What net equity allocation does your fund mandate permit? How much is the net equity allocation now and how do you determine extent of net equity allocation in this fund?
Himanshu: Reliance Equity Savings Fund is a conservative hybrid fund which would have 20-40% net equity exposure. While the range for net equity exposure is 20-40%, the fund would have the actual equity exposure closer to 40% at most times, unless in extreme situations, which may warrant reduction in exposure. Hence, the fund could be considered as a fundamentally conservative hybrid fund, providing nearly 40% equity exposure. Though the net equity exposure can only be up to 40%, the total equity exposure would be above 65% (by taking arbitrage exposure), making the fund an equity scheme. Hence, the applicable taxation would be that of equity schemes.
Essentially the fund would be ideal for conservative investors who seek moderate allocation to equities yet seek the tax benefits of equity.
The fund would be ideal for four types of investors:
First-time equity investors, who would like to test the waters with a moderate exposure to equities. They may not find diversified equity funds which invest 100% into equities or even hybrid funds which invest about 65-70% in equities appropriate, given their requirement to take baby steps to equity investing. Investors who seek moderate equity allocation, as part of their asset allocation requirements. Investors who fundamentally require a moderate equity allocation may prefer to invest in such funds rather than make separate investments into debt and equity. Investors who are wary about market levels, and yet who do not want to be completely out of markets. Such investors would be better off with a moderate equity allocation, and could use any market correction to increase their allocation to equities by switching out of this fund and into a full-fledged equity fund at an appropriate time. Retirees and investors who seek regular income may opt for such funds. The moderate equity exposure can help grow their retirement corpus in real terms (possibly beating inflation). The structure of the fund also could ensure that the fund returns are less volatile (than diversified or hybrid equity funds) and hence could generate returns and cash flows on a more consistent basis.
WF: How are the equity and debt components managed in terms of fund strategy?
Himanshu: While the asset allocation is conservative (up to 40% net equity exposure), the fund follows an actively managed strategy within equities and debt to generate returns. Equity exposure will be mostly into large cap stocks. The predominantly large cap strategy can potentially generate relatively stable returns, aligned to the conservative requirements of investors who come into such funds. Mid-caps would be considered, only if the valuations are compelling both in absolute as well as in relative terms compared with large caps. Such a strict consideration on valuation would automatically build a Margin of Safety when assessing opportunities in the mid-cap space.
The arbitrage position would be completely hedged.
The debt portion of the portfolio is predominantly accrual with low to moderate duration. The focus is on investing in corporate bonds with optimum liquidity, while keeping duration of the portfolio in the range of 2.5 to 3.5 years.
WF: Why do you believe this is an ideal inflation fighting regular cash flow providing solution for conservative investors?
Himanshu: All of us know the virtues of investing into equities. Sensex return since inception (Jan 1980 till now) is nearly 16% compounded. That is, Rs. 10,000 has become Rs. 25.3 Lacs. In the long term, equities are less risky than they are perceived to be. The probability of earning negative returns significantly reduces in the longer term. Despite the potential to earn higher returns through equities (the average rolling returns in Sensex has been above 16% across time frames) and equities being far less risky in the long term, equity participation in India is very low - only 4% of Household Savings in Financial Assets are invested in equities.
We believe that investors need to correct their under-allocation to equities by increasing their equity exposure. A product like Reliance Equity Savings Fund which provides moderate exposure to equity could be ideal to make a beginning and gradually increase equity investing.
The fund's asset allocation - about 40% net equities, with the rest being in arbitrage and accrual debt - could ideally help generate consistent, inflation-beating returns in the medium to long term.
WF: How does back testing data of your asset allocation stack up in terms of preserving capital and generating inflation busting returns?
Himanshu: We launched this fund in May 2015 - the fund has completed 2 years exactly. Since the launch, the fund has generated 16% absolute return during which time Sensex return was only 7.3%. Therefore, despite only 40% equity exposure, the fund has generated superior alpha even in a short period. Since the fund as such does not have a long-track record, we did back-testing of the strategy using our large cap strategy, Reliance Top 200 as a quasi for equity, RRSF - Debt as a substitute for the debt portion and our arbitrage fund for the arbitrage portion. The results were impressive.
On a 3 year rolling basis, the average return of the strategy was 13.9%. More interestingly, 100% of the times, the strategy return was above 10% on any 3 year period. While past performance may not indicate future performance, the back-tested results give us a lot of confidence in the robustness of the strategy in terms of being able to generate inflation-beating sustained returns over a period.
WF: For investors looking for regular cash flows, would you recommend an SWP or opting for the dividend option? How sustainable are monthly/quarterly dividends over a market cycle?
Himanshu: We do offer a Monthly Dividend as well as Quarterly Dividend option in the fund. Subject to market conditions, and availability of distributable surplus, we do intend to give regular dividends on a consistent and sustained manner. The Record Date for Monthly Dividend would be the Monday preceding the last Thursday (Futures expiry date) of a month and Quarterly Dividend record date would be 19th of every Quarter-end.
While dividend would be subject to market conditions, investors may also opt for SWP to get regular income. Regardless of market conditions, a set amount could be withdrawn every month, serving the requirement of regular income. We have facilitated the same by waiving off exit load up to 10% of withdrawal in the first year.
Interestingly, we have also waived off load for switch outs / STPs from this fund into other equity schemes. Partners and investors could use this facility to make investments into this fund to start with, and switch into a 100% equity fund later, when there is a market correction, or when they believe it is appropriate to do so.
WF: In what ways can we build consumer oriented communications that speak directly of the needs that such a product can serve, rather than describing the product features and returns?
Himanshu: Our endeavour always has been to talk the customer language than use rhetoric around technical details. In line with one of the positioning for this fund, for instance, - test the waters - we had used creatives and built communication showing a beginner literally wearing safety gears and trying to learn swimming. Literally, testing the waters. Likewise, in our other product communication as well, we try and as much show benefits rather than talk features.
The different types of mutual funds, serving different investor requirements, do provide opportunities to capture investor imagination in creative ways, within paradigms of advertisement guidelines laid out by the Regulator.
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