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For immediate periodic cash flows, here's a solution

Rajat Jain, CIO, Principal MF

8th August 2017

In a nutshell

Principal MF's range of hybrid funds - Balanced, Smart Equity and Equity Savings - have now got a Regular Withdrawal Plan which allows upto 24% withdrawal annually of the initial investment amount, without exit loads - making them useful propositions where periodic cash flows need to be planned, without any time lags. The range of hybrids cater to a variety of risk appetites, offering solutions for a wide range of investor profiles and needs. Rajat takes us through Principal's range of hybrids and how you can leverage the new RWP facility in them.

WF: Please take us through the positioning and performance of your three asset allocation funds - Balanced Fund, Smart Equity and Equity Savings Fund.

Rajat: We realize that investors have diverse expectations from funds depending upon what outcomes they are seeking from an investment. The expectations of investors could be around expected return, their needs for periodic income and cash flows, steadiness and consistency of returns etc. and would usually depend upon the risk level they are comfortable with in their portfolio, the time period for which they are looking to invest and choice of the underlying fund. Most retail investors are usually looking for exposure to equity while controlling for risk in their portfolio, and would like their investments to be tax efficient. Given this need of the retail investors, we have a bouquet of three hybrid equity funds in our lineup, viz. the Principal Balanced fund, Principal Smart Equity Fund and Principal Equity Savings Fund. The Balanced Fund is a regular balanced fund where we maintain equity exposure in the range of 65%-70%. The equity portfolio of the fund comprises a blend of large and midcap stocks, with midcaps being slightly more than half of the equity portfolio. The equity savings fund is a fund with a more conservative asset allocation with active equity exposure being capped at 30%. However, we have taken arbitrage positions to keep gross equity exposure in the fund above 65%.

The Principal Smart Equity Fund was launched in 2010, based on the insight that while the equity markets had generally done well in India, there was a divergence between the returns that the investors actually made and the returns the markets delivered. This was due to the fact that the investors usually were too bearish when the markets were bad, and too bullish when the markets were good with the result that they usually put money in the markets when the markets were close to a high. The fund has a simple philosophy, that the initial valuation at the time of making an investment is generally a good predictor of the future market performance going forward. With this approach, while the fund would generally underperform the markets on the upside in sharp rallies, it tends to protect the investor wealth on the drawdowns or when the markets are undergoing corrections. This approach has clearly worked for the Principal Smart Equity Fund, and while the average net equity exposure for the fund has been 60% since inception, it has beaten the NSE Nifty index for the period with lower volatility than the index. So we have three distinct, uniquely positioned strategies in the asset allocation space which we believe give investors looking to invest in this space a good option.

WF: Do market valuations warrant greater sales emphasis on asset allocation funds compared to pure equity funds?

Rajat: The markets are certainly not cheap and are trading at a premium to historical long term average valuations. In this scenario, markets could be susceptible to a correction and volatility. In this situation, asset allocation funds which have lower exposure to equity will be less volatile than pure equity funds. The case for asset allocation funds is equally strong from a long term perspective as they give equity exposure while protecting the downside, and as such can create long term wealth simply by losing less money in the bad periods.

WF: What is the new Regular Withdrawal Plan that you have launched and what incremental features over and above an SWP does it offer?

Rajat: 'Regular Withdrawal Plan (RWP)' is one of the smart feature in the industry which can help generate regular cash flows with a chance of capital appreciation for investors as money is invested in markets during withdrawal tenure. While the RWP facility is available across all Principal funds, there is no Exit load in Principal Equity Savings Fund (w.e.f 2nd Aug, 2017) and in Principal Smart Equity Fund & Principal Balanced Fund, investors can withdraw up to 24% of their initial investment annually without any exit load*. We believe this facility would be suitable and relevant for investors who seek immediate periodic cash-flows from start date of their investment.

*Allows you to withdraw up to 24% of the units allotted on or before one year from the date of allotment without any exit load for allotments made or SIPs/ STPs registered on or after June 15, 2017. Please check the applicable current load structure before enrolling for this option.

WF: To what categories of investors would you like to pitch the RWP on these three asset allocation funds?

Rajat: The Regular Withdrawal plan, as the name suggests, allows the investor to get a regular stream of cash inflows, as is needed by the individual to meet his/ her needs. These could be used by people who do not have a regular, periodic cash flows. These could be retired persons, who want inflows into their accounts. Also, it could be suitable for persons who are working but are not having a steady monthly salary. These could be freelancers, individuals working for themselves, and having income, but not a regular cash flow source. They can use the RWP to smoothen their cash flows needs and meet their interim liquidity needs.

WF: Principal is known globally for its retirement solutions. In what ways are you looking at promoting these 3 funds and the SIP/RWP propositions as retirement savings and retirement income solutions?

Rajat: As said above, the three asset allocation funds provide a distinct value proposition to investors. Depending on his/her risk profile, every investor needs to have some equity exposure in one's portfolio. These asset allocation funds, especially the Balanced Fund and the Smart Equity Fund allow investors to participate in the equity markets with limited volatility and can build wealth for the retail investor over the long term. The portfolio manager of an asset allocation fund does portfolio balancing at regular intervals, which keeps the portfolio risk in line with its objectives.

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Returns of schemes managed by fund manager PVK Mohan (As on July 31, 2017)






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