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Four funds to tide over the market volatility

With markets continuing to see-saw, here are four MFs you can count on, to tide over the volatility

UTI Dividend Yield : A cushion for iffy markets

Large-cap funds are the traditional refuge for investors who have the appetite for pure equity funds, but are looking for a cushion in volatile market conditions. With strong balance sheets and better earnings visibility in uncertain times, large-cap stocks are known to contain losses well in case markets take a turn for the worse. However, dividend yield funds is also a category where investors can turn to in iffy markets for downside protection.

Low returns in fixed-income options is another reason to invest in dividend yield stocks at this juncture. Besides, following a high dividend yield strategy also means focussing on stocks which are beaten down or those that haven’t participated much in the broader market rally, making some of them good value picks for the long-term.

Favourable market conditions since 2020 – the sharp market fall initially, the plunge in interest rates on debt products as well the meteoric rise in the markets which heated up valuations of many stocks – have brought the spotlight on dividend yield funds.

Over the past year, the category average performance of dividend yield funds – at 58.7 per cent – is higher than the 53 per cent clocked by large-cap funds.

UTI Dividend Yield is a good choice here.

Strategy and performance

While the scheme predominantly invests in dividend-yielding equities, it also picks its stocks based on other parameters such as free cash flow generation, management quality, earnings prospects, as well as industry scenario.

This strategy helps the fund eventually benefit from capital appreciation in the stocks in its portfolio.

As per its mandate, the scheme can invest across market-caps, giving its portfolio a flexi-cap structure. The fund though tends to lean towards large-cap stocks, with 72 per cent of its portfolio in large-caps now. It invests 95-99 per cent in equities across market cycles and does not take cash calls.

The fund is benchmarked to the Nifty Dividend Opportunities 50 Index and has clocked returns by up to three percentage points higher than the benchmark over one-, three- and five-year periods.

It must be noted that while dividend-yield funds tend to do well in volatile or bear markets, they may underperform in secular bull runs. This is true for the UTI fund as well, having outperformed the broader S&P BSE 500 in 2011 and 2016, for instance, while falling short in the bull market of 2009 and 2017.

Hence, the category is suitable for conservative investors.

Portfolio

UTI Dividend Yield invests predominantly in sectors such as information technology, consumer non-durables and certain PSUs, all of which have stocks with a consistent dividend yield record. Sectors such as IT and FMCG (fast-moving consumer goods) are also defensive bets, which tend to do better in volatile times.

With many banks facing pressures from bad loans and inability to pay dividends, the fund has reduced its exposure to the segment since mid-2017.

About five years ago, bank holdings stood at 20 per cent of the portfolio, as against 3 per cent now.

Consistent dividend payers such as Infosys, Hindustan Unilever, ITC and TCS are among the top holdings for the scheme. In FY20, for instance, these companies were among the top 15 dividend payers.

The fund also holds PSUs with good dividend yields, such as Coal India, GAIL, Mahanagar Gas, NTPC, NALCO, as well as in State-owned refineries.

While it tends to take exposure of 5-9 per cent in its top five holdings, the fund otherwise has a diversified portfolio of 40-50 stocks.

ICICI Prudential Balanced Advantage: Armour against wild swings

If you are wary of taking the pure equity fund route amid the current bout of market volatility but would like some equity exposure, you can invest in a hybrid product that takes a dynamic asset allocation approach. The 14-year old ICICI Prudential Balanced Advantage is an ideal candidate because of its proven track record of riding out market volatility by maintaining equity allocation levels based on market valuations. Thanks to this,investors can expect the fund to have a soft-landing even if the markets plummet.

How it works

When to enter, when to add or reduce exposure and when to exit the equity market is easier said than done. To tide over this problem, the fund uses a Price/Book Value (P/BV) Model (started from March 2010) that allows 'buying low and selling high' while keeping human emotions aside. We reckon this as a better defensive play than some other peers in the ‘Balanced Advantage’ category which use a counter-intuitive momentum approach.

The stock selection is a blend of large- and mid-cap stocks, with net equity level in the 30-80 per cent range based on the P/BV model. Derivative exposure is done for hedging/portfolio rebalancing. In March 2021-end, the fund had a net equity exposure of 38 per cent only, compared to 74 per cent a year ago when Covid fears sank markets.

Over the long-term, the fund's strategy has led to it losing less, which means winning more.sentencee.g. For example, the fund has a 10-year CAGR of 12.23 per cent versus 11.25 per cent of Nifty 50 TRI. Besides, the fund boasts of a better show than like-sized category peers in key risk metrics.

The three-year monthly standard deviation of ICICI Prudential Balanced Advantage (4.1) is close to category average and lower than peers such as HDFC Balanced Advantage (6.1) as per ACE MF data The downside capture ratio of the fund at 54.2 is lower than category average of 57 as well as peers including Tata Balanced Advantage (75.1), Nippon India Balanced Advantage (78.6) and HDFC Balanced Advantage (82.9).

This promises a relatively smoother investing experience. Besides, the fund has maintained an effective equity investment level above 65 per cent with the judicious use of derivatives, which ensures the tax treatment for the fund is akin to equity funds.

Performance

The proof of the pudding is in its eating.The fund has outperformed Sensex in the 15 worst months for the stock market since the fund's inception. Be it March 2020 when the index fell 23 per cent, in October 2008 when the index tanked nearly 24 per cent, or January 2011 when the index declined 11 per cent, ICICI Prudential Balanced Advantage contained losses well.

In flat markets too, the fund has done well. . For instance, when the index hovered around 30,000 levels between Jan 29, 2015 and Apr 7, 2017 dates, the fund gained 8.75 per cent CAGR. Between Sep 21, 2010 to Jan 30, 2013 when the Sensex remained near 20,000 levels, the fund gave 10 per cent CAGR.

In years when the markets have done well, the fund has not failed to some capture upside either. In 2020, when the Sensex after a roller-coaster year ended with 15.75 per cent rise, the fund gained 12 per cent. In 2019, the markets rose 14.4 per cent and the fund too was up by 11 per cent. In 2017, when markets jumped 28 per cent, the fund shot up by 19 per cent. And in years such as 2012 the fund (up 33 per cent) has even beaten a rising market (up 26 per cent).

Aditya Birla Sun Life Corporate Bond Fund: An option away from equities

If the fast and furious rally in the equity market post March 2020 lows took investors by surprise, the resurgence in Covid cases and the resultant lockdowns that dampened the market sentiment the past month were no less unexpected. Most recently, expectations of good quarterly earnings and offer of Covid-related help from many countries buoyed the market.

Those who cannot stomach much volatility and want to limit their exposure to equity can consider debt mutual funds. Past adverse credit events have, however, shown that debt funds are not risk-free. With the RBI having to balance the twin challenges of high inflation and fragile economic growth, the future rate trajectory is not clear. The Centre’s large borrowing programme too is expected to keep government bond yields at elevated levels.

In such an environment, corporate bond funds can be a safe bet for moderate risk investors with an investment horizon of three years. Corporate bond funds must invest at least 80 per cent of their assets in the highest-rated corporate bonds (typically AA+ and above). This ensures a certain degree of safety on the credit quality front. Additionally, to minimise interest rate risk, investors can choose a fund from the category with a relatively lower average maturity.

Downside protection

Corporate bond funds have offered an average one-year and three-year rolling return (compounded annualised return) of 8.2 per cent and 7.8 per cent, respectively, over the last five-year period (only schemes with at least five-year existence have been considered). Investors can consider the Aditya Birla Sun (ABSL) Corporate Bond Fund among the leading performers in the category. The scheme has generated an average one-year return of 8.8 per cent and three-year return of 8.3 per cent (both CAGR) over the same period.

Returns are likely to be relatively lower compared to the past, given the low coupons on bonds currently. However, this will be so across debt funds categories, , particularly for those with a longer duration.

What works for ABSL Corporate Bond Fund is its downside protection. For instance, during the last five-year period, the scheme generated one-year compounded annualised return (rolling return) of under 5 per cent less than 6 per cent of the time, lower than that for several peers. On a three-year rolling return basis too, the scheme generated at least 8 per cent (CAGR) 60 per cent of the time.

Good credit quality

The scheme fares well on the credit quality front. As on March 31, 2021, ABSL Corporate Bond Fund held over 94 per cent of its portfolio in AAA-rated and sovereign debt papers. The rest was in AA-rated papers and cash. Since July 2018, the scheme has almost always held 80 per cent plus of its portfolio is AAA-rated and sovereign debt papers.

As on March 31, 2021, the scheme’s top ten holdings included bonds from the government, public sector enterprises such as NABARD, REC and Power Finance Corporation, and leading private sector entities such as Reliance Industries and HDFC.

The scheme’s average maturity was 2.87 years as of March-end. In the past too, the average maturity of the scheme has ranged broadly between 1.8 to 3.2 years. The scheme follows a mix of accrual and duration strategies. Typically, 75-80 per cent of the scheme portfolio is invested in one-to-three-year corporate bonds. Active duration calls are taken only in the remaining 20-25 per cent of the portfolio.

As g-sec or government bond yields moved sharply up between July 2017 and September 2018, the average maturity of the scheme went down from 2.8 years to 1.7 years. Later, when yields fell sharply between February and July 2019, the scheme’s average maturity increased from 1.4 years to 2.5 years.

Suitability

Investors in the higher tax brackets, of say 20 per cent and 30 per cent and a holding period of over three years, can consider investing a portion of their surplus in the scheme. Debt funds attract long-term capital gains tax of 20 per cent, with indexation benefit, on sale of units held for more than 36 months. This makes them attractive compared to fixed deposits, the interest on which is taxed at an individual’s slab rate. Most two-to-three-year FDs from public and private sector banks are offering rates of 4.9 - 5.3 per cent and 5.15 - 5.75 per cent per annum, respectively. DCB Bank offers 6.7 per cent on its 700-day FD. Small finance banks are offering 6.5-7 per cent on similar tenure deposits.

Mirae Asset Hybrid Equity: Aggression as best defence

With the markets turning volatile since January this year, investors may have been lured to move in and out of equity. However, such an impulsive approach hurts returns in the long-run. A better way would be to invest in aggressive hybrid equity funds. These maintain a lion’s share exposure (65-80 per cent) to equities and thereby capture any upside, while the freedom to have 20-35 per cent in debt & money market instruments brings much-needed stability to the portfolio.

A worthy candidate in this category is the nearly six-year old Mirae Asset Hybrid Equity Fund, a top quartile performer that is not only less volatile but also generates more return for every unit of risk undertaken, vis-à-vis peers. The fund is ideal for investors with moderate risk appetite and the willingness to stay invested for at least five years.

Aggressive hybrid funds adapt static rebalancing process to keep their asset allocations within the prescribed limits. The rebalancing leads to better returns with lower volatility and risks. The five-year rolling returns indicate that aggressive hybrid category has generated better return than dynamic asset allocation category.

Performance and strategy

Since launch in July 2015, Mirae Asset Hybrid Equity has regularly managed to figure amongst top ten performers each calendar year in the jam-packed aggressive equity hybrid category.

The fund has also outperformed its aggressive hybrid category over three- and five-year periods by delivering 11.8 per cent and 13.8 per cent returns, respectively, against the category average returns of 9 per cent and 11.7 per cent. Over a one-year period, it has clocked a good return of 41 per cent but slightly below the category average return of 44.2 per cent.

In terms of risk metrics , the fund does a reasonably good job. Its three-year monthly standard deviation at 4.8 is lower than category average of 4.95 and that of many like-sized peers. Mirae Asset Hybrid Equity also generates more return for every unit of risk undertaken (sharpe ratio of 0.15) vis-à-vis category average (0.13) and many peers.

The fund's equity allocation generally ranges between 69-75 per cent. The investments in equities are predominantly in large-caps, with orientation mainly towards growth businesses with a focus on capital efficiency and quality management. With regards to portfolio construction, the fund keeps a large diversified portfolio (over 50 stocks), which can handle mistakes and deliver decent risk-adjusted returns.

Its debt strategy should be seen in two parts. The core is managed on a relatively static basis and is typically invested in government securities (9 per cent at present) and corporate bonds (3.3 per cent). The second part of debt allocation is more tactical, for which it adopts a more active strategy with appropriate changes in duration, in line with the outlook on interest rates. Thus, the broad debt strategy is to ensure that there is consistent benefit of directional returns in line with underlying market environment and an active management strategy.

In terms of the fund’s equity sectoral exposure, the top preferred sector is banks and the fund has gradually upped its allocation over the past six months and currently holds 21 per cent. Next is software with 9.9 per cent allocation. On the other hand, it has reduced the exposure to petroleum products to 6.6 per cent and finance to 3.7 per cent. It has added new sectors namely insurance, chemicals and cement recently. The fund has exited sectors such as healthcare services, construction, industrial capital goods and industrial products. It holds about 56 stocks and top 5 stock holding is about 25 per cent of the allocation.

Published on May 01, 2021

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