MFs are now attempting to push ‘simplified products’ like hybrid funds, having learnt a hard lesson after the NFO boom of 2006-07. Except that they are again following each other lemming-like in launching similar hybrid products
Faced with dwindling assets caused by changing regulation and investor apathy, mutual fund companies have now hit upon a new strategy - launch all-in-one or hybrid products. These products combine multiple asset classes in one, supposedly making the job of asset allocation easy.
Axis Triple Advantage Fund, now on offer, gives investors the chance to participate in three asset classes - equity-related, fixed income and gold. In April 2010 Religare Mutual Fund pioneered the move in this direction by launching a scheme that seeks to generate income through a portfolio of fixed income securities, gold and equity-related instruments. The scheme would invest 65%-90% in debt instruments, 0%-25% in equity and 10%-35% in gold ETFs (exchange-traded funds). The scheme is benchmarked against CRISIL MIP Blended Fund Index (65%) and price of gold (35%). Taurus Mutual Fund has just launched an open-ended income scheme called 'Taurus MIP Advantage' fund.
The scheme is identical to Religare's. It aims to generate regular income through a portfolio of fixed-income securities, Gold ETFs and equity. The scheme is benchmarked against CRISIL MIP Blended Fund Index (75%) and price of gold (25%). Clearly, no sooner has one fund company launched a new kind of product than lemming-like, others are rushing in, offering identical products.
But what is the reason that fund companies are looking at hybrid funds for their salvation? It appears that the stricter regulations enforced by the Securities and Exchange Board of India since August last year has led to a drop in new sales of equity funds and some deep introspection among the fund community. Since the massive bull run of 2003-2007, the only way fund companies wanted to grow was bringing new funds to the market. The standard strategy was to tempt investors with new fund offers (NFOs), many of which had fancy names and complicated strategies. Fund companies gave fat incentives to distributors in order to encourage investors to sell their existing funds and buy the new ones - especially since they were available for Rs10 - which was of course, highly misleading. Unfortunately, this led to terrible performance of the vast majority of funds launched during this period. And when SEBI took away the fat upfront incentives for distributors, fund sales nosedived. Now, the MF industry is aiming to build rapport with investors by offering 'simplified' solutions to them in the form of hybrid funds.
The logic behind it is to offer investors the 'opportunity' to participate and gain exposure to different asset classes under one roof. Hybrid funds invest in a mix of equity and equity-related instruments and fixed-income securities. Some even invest part of the corpus in gold ETFs (exchange traded funds), a recent favourite among investors. This stands in sharp contrast to the relentless spewing of innovative and complicated fund offerings in the recent past.
Rajiv Anand, managing director and CEO of Axis Asset Management Co Ltd recently wrote in newspaper Mint that "MFs spend a lot on getting new investors, but pay little attention to existing ones. But MFs are not a one-time fill-it-forget-it product... We need to find ways to meaningfully engage with these investors." In a burst of plain speaking Mr Anand wrote, "In all the cloud and dust created by a surfeit of NFOs and products, the ultimate use of the product has been completely compromised somehow." According to him the biggest challenge for the fund houses and distributors is to prepare themselves for the arduous journey of getting investments in their existing funds pretty much on a 24x7x365 basis." You thought that Axis Mutual Fund would stop launching NFOs and push its existing products? Despite all this talk, Axis has gone down the same road as its peers and done exactly what the rest are doing. It has announced a me-too NFO! It seems that fund companies will continue to move in herds and be driven by the fad of the day. Interestingly, coinciding with the Axis Bank NFO opening for subscription Mr Anand got an opportunity in Mint to beat his own drum: "The one obvious way is to educate, and, perhaps, the other is to ensure that products… should blend equity and debt components. In other words, they should be hybrid funds." How nicely self-serving.
That leaves us with one last question. So does this 'simplified' hybrid offering make sense for investors? Hybrid funds, in essence, are souped-up versions of existing products in the market - like balanced funds and monthly income plans (MIPs).
While these offer investors capital protection with a chance to participate in equity markets, hybrid funds go a step further - they simply add gold to the soup. Instead of simplifying matters, hybrid funds would only complicate them further. They will not match the returns of equity, they will be marginally better than debt, they will still be more volatile than fixed income. Finally, gold, now historically high, may drag down their returns drastically. Invariably, such funds will lead to very average returns for the investor. The question is do investors care either way? — Debashis Basu