Anupam: Hi listeners, we at Aditya Birla Sun life Mutual fund have come up with a special podcast series called MF 101 in collaboration with Bloomberg Quint. MF 101 is an informative series that will help you understand the recipe behind mutual fund investments and what’s more? It’s coming from the chefs of the mutual fund buffet table. From the very own fund managers and analysts who are the manufacturers of the funds that help you realize your investment goals.

Hi, I’m your host Anupam Gupta, B50 on twitter and in this episode, we are going to discover the recipe behind asset allocation and hybrid fund from our guest chef Vineet Maloo who is a fund manager at Aditya Birla Sun Life Mutual Fund.

Anupam: Vineet welcome to the show!

VINEET: Thanks, Anupam for having me here!

Anupam: Before we start the discussion, tell us something about yourself how you got into Aditya Birla Sun Life Mutual Fund, were you always interested in stocks? Let’s start with that.

VINEET: I started my career as a management trainee with Aditya Birla Group and I did not start with the mutual fund I was in Hindalco I was attached to CFO office in the metal’s business. Just two years into my job there was an opportunity to move into mutual fund size as an analyst for metal sector and that’s how I came here, and I have been here for last twelve years now.

Anupam: That’s fantastic! The Birla Group I believe has a lot of companies within them and so they have got Hindalco and so moving and already covering and working in a metal company you are now goanna be you know you actually found a very common thing in moving as an analyst in the metal fund so was it a nice shift so did you enjoy from you know working as an employee to working as an analyst.

VINEET: I was always interested in stock markets I have been following them right and having worked in a metal company it helped me to make the transition as an analyst covering that industry. So, it was quite interesting to move here, and it was a different angle from which we looked at companies compared to when I was inside a company

Anupam: Fantastic! Folks, we are goanna talk about a very important aspect of investment, Right, we are goanna talk about asset allocation because a hybrid mutual fund is a very important part of asset allocation and you are wondering what exactly asset allocation is sounds very boring. But think about it this way, Jan 2008 markets are doing fantastically well, and you bring in all your money and you put it into the Sensex or in the nifty when I believe if I remember the Sensex was about 22,000 or some obscene number and then within a year you were down 50%. That completely ruins all the financial planning. Instead, if you had an approach of allocating only say 50% of your funds in Equity, 50% of your funds in Debt that would have been much and saved you to some extent from the crash because you also exposed to the debt mutual fund side. India, traditionally in any case has been obsessed so to say with gold, real estate and a lot of these things so all of us already have a certain asset allocation in mind but Vineet is goanna tell us what exactly and how does asset allocation work and why is it important to us.

VINEET: Right so as you said that asset allocation basically means how much you put into different assets be it equity, debt or real estate or even gold like we Indians mostly do. Infact there are ordinary asset classes also where globally lot of people allocate money. But focusing on two large asset classes which are present in India is equity and debt and you could further differentiate between debt and cash or you want to invest in bond, or you want to keep money aside in a fixed deposit. But if you look at its ultimate voiced down to where you put how much money and why that is important is a) It gives you benefit of Diversification so you highlight it as there was a crash in the market having a debt also in your portfolio would have helped save money to that extent which you could again recycle back into equity whenever the market is actually at a low level and second is it gives you optionality to take advantage opportunity like you could have done it at the bottom of the market or near the bottom of your market and third is you could align it with your own financial goals. What kind of asset you invest in would probably depend on what kind of financial goals you have and when you want to utilize that money?

Anupam: That’s really interesting Vineet right because all of us look at our mutual fund investments as only equity or only debt. People will go into equity typically wants a higher rate of return, they are willing to take more risk. People who go into debt have their own reasons. Now there is this specific type of mutual fund scheme so to say called a Hybrid. Can you tell us what exactly is a hybrid mutual fund scheme?

VINEET: Hybrid mutual fund scheme invests both in equities as well as debt markets. It could vary proportion of equity and debt in a very narrow range. So instead of getting only pure equity or only pure debt fund what you will get a mix of two and you don’t have to bother about when to switch from one to the other. For instance, we have a classically which are called balanced funds they move in their equity between 65-75% of the fund and investor do not have to take care of that the fund manager does it on its own on behalf of the investor. For investors who prefer slightly lower risk or lower volatility we have what we called saving fund like equity savings fund where typically equity component range is around 25% (+ or –) you know 5% is points. You know there also you get a good flavor of equity, but stability of debt returns and there’s a third type of fund which we call dynamic hybrid funds or nowadays they are called balanced advantage funds where the proportion of equity can vary very widely from 10% to 90% and that depends on various factors whether it is market valuation, whether it is volatility or it is macroeconomic forecast, etc.

Anupam: That’s interesting right because hybrid matches the best of equity and the best of debt in a certain way. You mentioned something about static investing vs dynamic investing. Can you tell us what exactly is this concept?

VINEET: Funds which have static allocation can move in a very narrow range for their equity allocation so traditional balance funds can move from 65%-75% and that’s all it can do and so whenever equities goes up a lot you can recycle some of that money into debt side and move down to 65% in terms of equity whereas dynamic funds can move into a much wider range so you could go from 10% equity to about 90% and some could even go up to 100% equity. Or the way the returns are expected from either equity or debt market

Anupam: And how does this work this is like saying that on Jan 1st,2019 let say you have got Rs 65 in the Sensex and let say Rs 35 in a liquid fund or a FD or maybe in some kind of debt paper. Okay, at the end of the year the nifty has gone up 20% so 65 will probably move up to 70.3 or 65+20% it has increased in value debt has more or less remained the same or given you 8% what happens then?

VINEET: So, for a Dynamic fund what the fund manager would look at is that what would market likely do from this point onwards. If he thinks that the valuations are very high, he would probably start reducing equity move more towards debt maybe bring it down 50% and as long as you know valuation continues to remain high maybe he would continue to move more and more towards debt and could bring it down close to 10% or so and the reverse also holds true. For example, if we were to be in October 2008 where the valuation would be quite low that would be a good time for fund manager to move from debt towards equity. Increase equity exposure as you know valuations are in your favor.

Anupam: So, the question that comes to my mind is how hybrid mutual funds are taxed right because equity is very simple it’s like one-year Long Term Capital Gain LTCG and stuff like that and then less than one year is Short Term Capital Gain STCG and then there’s also the aspect of Dividend option vs the growth option. Can you tell us from the income tax angle how are the hybrid mutual funds taxed?

VINEET: Hybrid mutual funds are taxed just like equity mutual funds that holds true for all kind of hybrid funds because industry designs products to be tax sufficient so even the funds which have low equity allocation which have balance which are in 65-75 and the dynamic everywhere is taken care the funds are designed to be tax sufficient so taxation is the same as normal equity funds which is 10% for LTCG and your marginal rate for STCG. Dividends are taxed at 10% in case of dividend distribution tax. So, there is no difference from equity funds.

Anupam: That means that if I am the unit holder and I have chosen the dividend option I am goanna get dividend that’s already been taxed by the fund so If the fund has Rs100 to give out as first paid tax to the government and only out of the remaining do, I get Dividend, right?

VINEET: Absolutely! So, you will get the remaining amount and tax will be deposited to the government directly from the fund.

Anupam: Great! Vineet last question I am trying to understand How a Hybrid mutual fund can work in my financial planning how I can use it for my particular case you know say that I have certain goals. Maybe I am paying back a house, paying back a home loan, maybe I have got my children’s education to take care of 10 years 15 years. How do the hybrid mutual funds fit in down here?

VINEET: So, the hybrid fund could help you deliver relatively more stable return compared to an equity. Typically for investor who has got long time horizon people recommend equity. But what happens is whenever you are goanna taken out of equity fund or any equity investment and use it towards some payment or towards some purchase etc. You want to make sure that at least you are taking money out of a good time. So what hybrid fund does for you is that it automatically takes that money out at a good time and reallocates it towards debt. So, your returns are much stable, your corpus is much more stable compared to your pure equity fund. So, the investor can invest there where the returns are relatively more stable. They will be slightly more volatile than your than FD but its certainly more tax sufficient and better returns.

Anupam: Fantastic! Folks that is a wrap on our show. For more such interesting know how’s continue listening to our Podcast MF 101 or simply follow the blog page of Aditya Birla Sun Life Mutual Funds, Bloomberg|Quint, IBM podcast or wherever you get your podcasts from. If you had any queries or some specific subjects you want us to talk about, with regards to mutual fund investments, reach out to us on our Twitter handle @abcabslmf. Thank you for listening to this podcast!

Mutual fund investments are subject to market risks, read all scheme related documents, carefully.

The views and opinions expressed herein are personal and do not necessarily reflect the views of Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”). ABSLAMC/ the Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments.”