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Business News/ Money / Calculators/  The changing flavour of balanced funds

The changing flavour of balanced funds

U.K. Sinha has said that balanced funds should have a more equitable distribution between equity and debt

A file photo of Sebi chairman U.K. Sinha. Photo: MintPremium
A file photo of Sebi chairman U.K. Sinha. Photo: Mint

At the Confederation of Indian Industries’ Mutual Fund (MF) summit held on Tuesday, the Securities and Exchange Board of India (Sebi) chairman, U.K. Sinha, praised the MF industry on the outperformance (against benchmark) they achieved in the past year. He also urged them to clean up their act in matters such as the appropriate use of investor education funds and moving forward with digital transactions.

Sinha addressed many other issues on the sidelines of the conference. One such issue that Mint asked him about was the difference in the asset allocation pattern of balanced funds looking to get launched versus the pattern for existing funds.

As a category Sebi seems to have taken a tough stand on balanced funds, where approvals are hard to come by. On the whole, concerned over multiple schemes in the Indian MF industry that have much in common, Sebi has been giving fewer approvals to new scheme launches in the past few years.

Some senior fund officials said, on condition of anonymity, that Sebi wants fund houses to launch balanced funds that invest 50-60% in equities and the rest in fixed income. Currently balanced funds typically have 65-80% in equities. Will Sebi extend the same requirement to existing balanced funds that continue to tilt significantly towards equity?

“There appears to be a misconception that Sebi is differentiating between large fund houses on one side, and small- and mid-sized fund houses on the other. There is no such thing. Balanced funds should be balanced and they should, therefore, have a more equitable distribution between equity and debt," said Sinha. He also said “chances of mis-selling are higher", in new fund offers.

JPMorgan India Balanced Advantage Fund (JBA), launched earlier this year, couldn’t be launched as a balanced fund like one of the old generation balanced funds, senior fund industry officials had pointed out to Mint earlier.

It had to change its asset allocation to meet Sebi’s requirements. It now invests 30-60% in equities, 30-60% in fixed income and 5-10% in arbitrage opportunities. In other balanced funds, the minimum equity exposure is 65%; in this scheme, the maximum wouldn’t exceed 60%. Plus, it added the word “Advantage" to its name. Senior fund industry officials said JBA’s application was kept pending for over a year at Sebi till it changed its asset allocation. JPMorgan Asset Management India Co. Ltd officials did not offer any comment.

Though Sinha didn’t comment on whether Sebi would nudge existing balanced funds to reduce their equity exposure to align to its thinking of how balanced funds should behave, he said, “Sebi will nudge existing fund houses to merge their excess schemes and those that overlap." In budget 2015, it was said that if two or more MF schemes merge, then there shall be no incidences of capital gains tax that could possibly arise. Sinha alluded to this rule and said that “within the next year, we should see more scheme mergers across all fund houses, irrespective of their size".

Next week, another scheme Mirae Asset Prudence Fund will be launched. It will invest around 65% in equities, around 8% in mid-cap scrips and 25%-30% in fixed income securities. However, Mirae Asset Global Investments (India) Pvt. Ltd refuses to call it a balanced fund. “This is not a balanced fund. This is an equity-oriented asset allocation fund, which will have a bias towards large-cap stocks", said Gopal Agarwal, chief investment officer, Mirae Asset. In reality, it looks similar to old generation balanced funds, which invest at least 65% in equities, and the rest in debt.

Digital is the way to go

Sebi wants to see a shift towards digitization. Acknowledging that the MF industry is behind the curve on digital or electronic transactions, Sinha said, “For the banking sector, 30% of the transactions are done electronically. This contributes around 3.2% in the total value of transactions; whereas for the MF industry the total value through such transactions is only 1.3%."

He also said that the steep growth in e-commerce is a sign that individuals are willing to transact online and urged the MF industry not to lose this opportunity.

“If we look at the customer experience from mutual funds, only 7% is positive. This shows early signs of weakness in the industry and if this is not addressed, the optimism will be short-lived," he added.

Over the next five years, there will be a decisive shift towards electronic transactions across the financial sector, said Prateek Pant, executive director products and services, RBS Private Banking, India. “The MF industry needs to look outside it’s own segment and try to adopt some successful models which already exist in the digital space."

While most MFs already have online transaction processes in place, the paper route is still preferred by investors. Most fund houses have even enabled trades through mobile phones, though only about 130 crore of transactions have taken place so far.

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Published: 01 Jul 2015, 01:50 PM IST
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