Baroda Pioneer Mutual Fund launches Baroda Equity Savings Fund (BESF), an open-ended scheme from a sub-category of the hybrid fund.
Equity Savings Fund as categorised by the market regulator, SEBI, is a Hybrid Fund. Meaning, it invests in equity and equity related instruments (including derivatives), debt & money market instruments, and would explore arbitrage opportunities. If there are no arbitrage opportunities available, the scheme has the flexibility to invest in debt.
The gross equity exposure of these funds is at a minimum of 65% & its debt exposure is restricted to 35%. The equity and the derivative exposure are considered as ‘equity’ allocation and hence, these funds are treated as equity funds. The unhedged equity exposure typically ranges from 15% – 40%, and the rest of the portfolio is hedged to gain from arbitrage opportunities. Arbitrage profits on the hedged positions enable such funds to generate additional returns to investors.
Off-late, the equity markets have been extremely volatile this year, while the bond markets are not safe either. The stock picking has become difficult while constructing a pure equity fund or even while choosing debt instruments for a pure debt fund, credit quality has become a major concern.
This, in fact, has irked investors for a couple of years now. So mutual fund houses believe that Equity savings fund can be a saviour as it offers the benefit of both the asset classes. Hence, Baroda Mutual Fund joined its peers to launch Baroda Equity Savings Fund.
The fund house explains that the main purpose of this fund is to balance the risk-return characteristics of different asset classes by investing in equity, debt and derivatives. Usage of derivatives reduces equity exposure and consequently protects investors from the volatility of returns.
As per the mandate, BESF will invest up to 90% of its assets in equity and equity related instruments (including hedged and unhedged positions) in normal circumstances and the remaining in debt & money market instruments and units issued by REITs & InvITs.
However, from a risk standpoint, given that BESF portfolio will typically have a dominant exposure to equity and equity related instruments—including unhedged equities. So, the scheme is suitable only if you have a moderate-to-high-risk appetite and have an investment time horizon of at least 3-5 years.
Image 1: Risk-return matrix of Funds
(Source: Baroda Equity Savings Fund NFO- presentation)
Do note that from a tax implication standpoint, an equity savings fund is classified as an equity-oriented mutual fund scheme. Hence, if redeemed within a holding period of one-year, Short Term Capital Gain Tax (STCG) tax @ 15% will apply. And if redeemed after a period of 1 year, the Long-Term Capital Gains (LTCG) in excess of Rs 1 lakh will be taxed @10%.
Table 1: Details of Baroda Equity Savings Fund
|An open-ended scheme investing in equity, arbitrage and debt instruments
|Hybrid Scheme – Equity Savings
To generate capital appreciation and income by using arbitrage opportunities, investment in equity/equity related instruments and debt/ money market instruments.
However, there is no assurance or guarantee that the investment objective of the Scheme will be realized.
|Rs 5,000 and in multiples of Re 1 thereafter
|Rs 10 per unit
|Mr Sanjay Chawla (Equity), Mr Dipak Acharya (Equity) and Mr Alok Sahoo (Fixed Income)
|40% NSE 50 Arbitrage index, 35% NIFTY Short Duration Debt index and 25% NSE100 index
|July 04, 2019
|July 16, 2019
(Source: Scheme Information Document)
How will Baroda Equity Savings Fund allocate its assets?
Under normal circumstances, the broad investment pattern will be as under:
Table 2: BESF’s Asset Allocation
|Indicative Allocation (% of Total Assets)
|High/ Medium/ Low
|Indian Equities and Equity Related Instruments
|i. Equity and equity related securities (unhedged); and
|ii. Equities, equity related securities and derivatives including index futures, stock futures, index options, & stock options, etc. as part of hedged / arbitrage exposure (hedged)
|Medium to High
|Debt and money market instruments*
|Low to Medium
|Units issued by REITs & InvITs
*Investment in securitized debt will
not exceed 10% of the net assets of the Scheme.
The Scheme will not invest in foreign securitized debt.
Gross equity exposure will be maintained between 65% to 90% and the net long equity exposure will be between 0% to 50%. The Scheme may take derivatives positions up to 65% of the net assets of the Scheme, based on the opportunities available, subject to the guidelines issued by SEBI from time to time, and in line with the overall investment objective of the Scheme. These may be taken to hedge or rebalance the portfolio, or to undertake any other strategy as may be permitted under the Regulations from time to time.
The Scheme may engage in stock lending to the extent of 20% of the net assets of the Scheme
(Source: Scheme Information Document)
What will be the Investment Strategy?
Baroda Equity Savings Fund has a dual objective of generating capital appreciation by investing in equity and equity related securities as well as generating income by investing in debt and money market securities while attempting to manage risk from the market through active asset allocation. In order to achieve this process, the Scheme will follow a top-down and bottom-up strategy.
The AMC has built a proprietary model for asset allocation based on the valuations and fundamentals of the companies. The asset allocation between equity and debt will be determined by the model and the top-down process will help in deciding the sector allocation while the bottom up process would lead to the construction of the portfolio using specific securities.
Image 2: Proprietary Model Diagram
(Source: Baroda Equity Saving Fund- One pager )
The model will be revisited if needed, and adjustments made if needed, to ensure that the outcomes remain relevant to the market environment. The model would be run on a monthly basis to decide the asset allocation. Generally, once the allocation is fixed, it will not be changed till the next month except in case of extraordinary situations where extreme volatility in the markets would force a change in asset allocation.
Though the Scheme would ensure adherence to the overall investment exposure limits defined by SEBI for the scheme category, it retains the flexibility to deviate from the equity and debt exposures as provided by the proprietary model, depending on the market conditions, market opportunities, applicable regulations and political and economic factors.
Equity allocation based on the model
The gross equity exposure will be maintained in the range of 65% to 90% while the net equity exposure will be maintained between 0% to 50%. The difference between gross and net variation would generally be invested in arbitrage or in arbitrage equity mutual funds. The model would follow the matrix approach for asset allocation based on different parameters.
Fixed Income allocation based on the model
The exposure to Debt & Money Market Instruments including cash and cash equivalents will be maintained in the range of 10% to 35%. The model would follow the matrix approach for asset allocation based on different parameters.
Once the asset allocation has been decided based on the model, the portfolio would be constructed based ontop-down as well as bottom-up approach using our core principle of investing, GARP (Growth at a Reasonable Price). The Scheme retains the flexibility to deviate from the asset allocation model, depending on the market conditions, market opportunities, applicable regulations and political and economic factors.
Who will manage Baroda Equity Savings Fund?
The Baroda Dynamic Equity Fund will be managed by Mr Sanjay Chawla (Equity), Mr Deepak Acharya (equity) and Mr Alok Sahoo (Fixed Income).
Mr Sanjay Chawla is the Chief Investment Officer of Equities at Baroda Pioneer Asset Management Company Limited. He holds a degree in Master of Management Studies (MMS) from BITS, Pilani. Mr Sanjay Chawla has over 29 years of experience in fund management, equity research and management consultancy. Prior to joining the AMC, he has worked with Birla Sun Life AMC as Sr Fund Manager-Equity, managing various schemes with different strategies. Mr Chawla has also worked as Head of Research with SBI Capital Markets and in various capacities in the equity research space in Motilal Oswal Securities, IDBI Capital Markets, SMIFS Securities, IIT Invest Trust & Lloyds Securities.
He is the lead fund manager at the AMC, few schemes that he manages include Baroda Pioneer Multi-Cap Fund, Baroda Pioneer ELSS’96 Fund, Baroda Pioneer Hybrid Equity Fund, Baroda Pioneer Large cap Fund and Baroda Pioneer Mid-cap Fund.
Mr Dipak Acharya is an M.Com., with the added qualifications of AICWA, CAIIB and PGPMS. He has been working in the investment area in the asset management industry for over 15 years now.
He has been with the organization since September 2008. He was also the Fund Manager at BoB Mutual Fund from August 2003. Prior to this, Mr Acharya was with Bank of Baroda, where he worked in the Treasury Dept. and Credit Dept for 10 years.
Currently, some of the schemes which Mr Acharya manages at the fund house include Baroda Pioneer Multi-Cap Fund (Earlier known as Baroda Pioneer Growth Fund), Baroda Pioneer Large cap Fund, Baroda Pioneer ELSS’96 Fund, Baroda Pioneer Hybrid Equity Fund (Earlier known as Baroda Pioneer Balance Fund), Baroda Banking & Financial Services Fund, Baroda Dynamic Equity Fund and Baroda Pioneer Mid-cap Fund.
Mr Alok Sahoo is the Head of Fixed Income at Baroda Pioneer Asset Management Company Limited. He is a management graduate in Finance from XIM, Bhubaneswar, with a BE degree from NIT, Rourkela. He has been working in the investment area in asset management for more than 17 years. Prior to joining the fund house, he was a fixed income fund manager at UTI Mutual Fund and at HSBC Mutual Fund. He was also the Fund Manager for the Employee Provident Fund at HSBC Asset Management. He has experience in the credit research of companies as well.
Currently, Mr Sahoo manages Baroda Pioneer Liquid Fund, Baroda Pioneer Treasury Advantage Fund, Baroda Pioneer Short Term Bond Fund, Baroda Pioneer Dynamic Bond Fund, Baroda Pioneer Credit Risk Fund and Baroda Pioneer Short Duration Fund.
The outlook for Baroda Equity Savings Fund
To achieve the stated objective, the fund managers of the Baroda Equity Savings Fund will use arbitrage opportunities, invest in equity/equity related instruments and debt/ money market instruments actively.
So, the fortune of BESF will be closely linked to how resourcefully the fund managers handle the asset allocation, and of course, the underlying instruments it holds in the portfolio, even as it follows a mix of a top-down and bottom-up approach to investing backed by certain research parameters of its proprietary model.
Image 3: Proposed asset allocation to deal with downside risks
How dexterously the fund managers may shift the asset allocation within equities–between unhedged and hedged portion–and from equities to the debt during defensive consideration, remains to be seen.
As in the current market conditions where small-cap and mid-cap companies are hammered, and so have large caps tumbled on account of the Budget announcement of surcharge; it provides an opportunity to do some value buying but valuations aren’t cheap.
The markets brace up for the results season, and the corporate earnings need to start justifying the valuations, there are governance issues with a few companies, and some companies that are debt-free aren’t cheap.
Global headwinds are also in play such as the geopolitical tensions, so going ahead the equity markets are expected to remain highly volatile. So, for the fund managers constructing the portfolio would not be easy and may inflict very-high-risk.
As far as the debt markets are concerned, the 10-Year Benchmark Yield in G-Sec slipped below to 6.6%. It has been dipping since the successive 25 basis point rate cut in repo rates.
Plus, the Monetary Policy Committee (MPC) changed the stance of monetary policy from neutral to accommodative in the last bi-monthly monetary policy statement for 2019-20 (held in June 2019). It was done in order to achieve the medium-term target for consumer price index (CPI) inflation of 4 per cent inflation and to boost the subdued GDP.
Nevertheless, the mandate of the fund could come as precaution provided the fund managers uses it thoughtfully to construct the investment portfolio, both equity (including derivatives) and debt, plus even while exploring arbitrage opportunities.