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An ideal solution to step up from FDs

Ruchit Mehta, Fund Manager, SBI MF

In a nutshell

Ruchit highlights the product construct and performance of SBI Equity Savings Fund to draw our attention to its high degree of suitability for investors taking their first step into the world of market risk products as well as for investors cutting back on equity allocation as they move into retirement mode. Though the product is very suitable to a vast segment of investors, Ruchit believes a lot more can be done in the area of educating investors about this category. A gradual step up (or step down) rather than quantum changes in risk appetite is a whole lot more sensible, as is highlighting long term post tax returns over a 5 year + period rather than periodic dividends.

WF: Your fund has delivered around 13% returns over the past 12 months, in a category which has seen a range of 15% to 10%. Is the wide dispersion of returns in this category reflective of differing levels of net equity exposure or is it more a function of alpha from a similar proportion of equity exposure?

Ruchit: The SBI Equity Savings Fund has delivered a return of 16% over the last 1 year (regular plan, as on 25th December). The category definition allows for a very wide range for the allocation to the long equity component. The net equity exposure can vary from 20% to 50%. Within the net equity exposure every fund has its own strategy, such as the allocation to mid & small capitalisation stocks may vary. This wide range in equity allocation and individual strategy causes the wide dispersion in the returns.

WF: What is your equity strategy in this fund?

Ruchit: The SBI Equity Savings fund has a dynamic asset allocation strategy. 70% of the fund allocation is fixed. 20% is allocated to a net long portfolio of stocks which is actively managed as a multicap fund. 20% is allocated to arbitrage opportunities and 30% to fixed income securities. The balance 30% gets allocated dynamically between an equity portfolio which mimics the Nifty Index and arbitrage opportunities. The fund allocation is decided by an internally developed asset allocation model which considers factors such as momentum, exhaustion of momentum and rate of change.

WF: How is the debt component of the fund managed? In what ways have you tried to shield it from the recent bout of volatility in debt markets?

Ruchit: Most of the debt portfolio is constructed with allocation to 2 - 3-year corporate bonds with the primary focus being accrual. Most of these securities are rated AA with some allocation to the "A" rated space. Duration calls are taken in the fund dynamically based on the internally developed allocation model. In the last six months while bond yields have moved higher the modified duration of the fund has been around one year, thus protecting downside to returns.

WF: There is a general expectation that this category, with its 30-35% net equity exposure, should yield low double digit returns in the range of 10-11% p.a. in the long run. Returns over the last 3 years in this category are closer to 8-9% p.a. although the last 12 months have been better. Is it reasonable, going forward, to expect a 10-11% p.a. return for a 3 year holding in this category?

Ruchit: A 10% net of expenses return in a strategy that has roughly 1/3rd in each asset class has an implicit expectation of 18-22% equity returns. This assumes the current levels of bond yields and arbitrage returns. Over a 3-year time horizon there is a fair amount of risk in any equity investment. An investor should look at a 5 year investment horizon.

WF: What is your dividend policy in this fund?

Ruchit: It is a function of the distributable surplus. we will endeavour to distribute the surplus over a period of time.

WF: Who is the ideal target audience for this fund and how do you think the fund should be positioned for this target audience?

Ruchit: This fund is suitable for investors who have a risk appetite higher than an MIP fund, but not enough to invest in a balanced category fund. This product could be part of a gradual step up (or step down for a senior citizen) in an investors equity allocation. The structure of the fund requires a fair degree of education of the fund features to the investor. The focus should be post tax returns over a period and not only dividends earned.

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