Specialized investment funds (SIFs), a new category of mutual funds that follow long-short strategies, can’t find enough benchmark indices against which the performance of their schemes can be evaluated.
There are limited options of benchmark indices for SIFs and the ones available may not always be the best fit to compare the performance and risk-appetite of their strategies, fund managers told Mint.
SIFs cater to investors with a minimum investment of ₹10 lakh and a higher risk appetite. They were introduced in India in April last year to bridge the gap between regular mutual funds and portfolio management services meant for high-net-worth individuals.
Their strategies involve taking long positions in undervalued securities and short positions in overvalued assets. This allows fund managers to benefit from the market’s growth while moderating risk.
To solve the benchmarking issue, a committee within the Association of Mutual Funds of India (Amfi) has started initial work on whether new benchmarks can be added for SIFs, an official with direct knowledge of the matter said. The committee is waiting for more types of SIF strategies to come into the market, after which a decision on adding new benchmarks will be taken, the official added.
Mutual funds and SIFs use benchmark indices to assess whether their performance has been better or worse than the broader market. The Securities and Exchange Board of India has prescribed a list of benchmark indices that can be used for SIF categories such as equity, debt and hybrid. The list includes the Nifty 50 Hybrid Composite Debt 50:50 Index and the Crisil Hybrid 85+15 Conservative Index.
In the absence of an appropriate benchmark, the true performance of a scheme may not be reflected, experts said. A straitjacket strategy for different funds, even within a category, may not work because asset allocation ranges can be very wide, a senior asset management company official said.
Measuring risk
In a hybrid strategy, equity exposure could range from 25% to 75%. One fund could be at 20% and another at 75%, yet both may end up using the same benchmark, the official added. In this case, the fund with greater equity exposure will most likely outperform its benchmark while the fund with a lower equity exposure may not.
Gaurik Shah, senior vice president - equity investments at Mirae Asset Mutual Fund, said the benchmarks currently used are decided on the basis of cash deployment rather than how much risk is taken. If a hybrid fund has ₹100 and invests ₹75 in shares, it could be assigned a benchmark with 50% equity and 50% debt because more money is invested in equities.
However, Shah said this is not the true picture. The fund could use derivatives to reduce risk so its actual exposure to the equity market is much lower.
Shah said benchmarks should instead be based on the fund's delta, which measures how much the portfolio moves when the market moves. If a fund has a delta of 1, it will rise 1% when the market moves 1%. If its delta is 0.25, meaning lower risk, it will move only 0.25% for a 1% move in the market.
Sirshendu Basu, head of product management and strategy at Bandhan AMC, said the regulator has a set of fixed benchmarks to maintain standardization and make comparisons easier for investors.
Basu added that while a tier-1 benchmark is mandatory for regulatory purposes, fund houses can also use a tier-2 benchmark to help investors gauge a fund’s specific investment style, strategy and for better manager evaluation.
Sub-categories
Some experts suggested creating sub-categories so that each of them gets a different benchmark and correct comparisons can be made. Laukik Bagwe, chief investment officer SIF at ITI Mutual Fund, said that even for a category like hybrid with an arbitrage sub-category, there are multiple approaches, making like-for-like comparisons difficult.
“The regulator could consider creating sub-categories, so investors can compare funds with similar strategies,” said Bagwe.
SIF schemes as well as benchmarks are still evolving and as the segment matures, regulators may standardize investment approaches and potentially improve benchmarking, said Anup Bhaiya, founder at Money Honey Financial Services.
“In that case, investors should focus on the investment framework, not just if the fund has outperformed the benchmark. They should look at what level of equity risk the fund takes and whether that framework matches their investment objective,” said Bhaiya.
SIF assets were worth ₹13,814 crore, or roughly 0.17% of total mutual fund assets, as of May, according to Amfi. About 72% of the assets are under hybrid strategies while the rest are in the equity category.