![25 and stepping into the market for the first time? Hybrid funds are just for you, says V Srivatsa](https://img.etimg.com/thumb/msid-111128395,width-210,height-158,imgsize-40202,resizemode-75/25-and-stepping-into-the-market-for-the-first-time-hybrid-funds-are-just-for-you-says-v-srivatsa.jpg)
Given the time right now and the kind of uncertainty which a new investor who has just got introduced to equity markets in the last two-three years must be witnessing, especially after the June 4th fall, how do you think a hybrid fund would be for young investors just entering in the equity market who have just seen a one-sided runup?
V Srivatsa: If you look at the hybrid funds as a construct, especially the aggressive hybrid fund, the equity allocation is between 65% and 80% and the average equity allocation across the category would be about 71-72%. So, in this kind of a scenario, in this kind of a market where equity valuations are trending on the higher side, there is a huge amount of volatility on the global side either in terms of geopolitical or recession in US or Europe or high rates continuing in the longer run in the global markets.
In this scenario, these funds are very ideally placed because we invest an average of around 70-71% in equity and the balance is invested in debt. Sometimes debt runs a little bit counter cycle to equity because debt or fixed income as an asset class has its own cycles. So, in this current scenario where the valuations of the Indian markets are trending high at a slight premium to longer term averages, the global markets are pretty volatile and India stands out as an outlier, I think these category of funds makes a very good investment case for people who are just beginning to make an exposure into equities.
This reduces the volatility and also there could be scenarios where debt can probably make returns quite similar to equity but on a risk adjusted basis could be better. So, we could probably be heading into those years and these funds are a very ideal investment for those kinds of investors.
But I also want to understand the current composition of your UTI Aggressive Hybrid Fund with 65% being invested in equity, what kind of portfolio mix is there in terms of sectors and allocation?
V Srivatsa: We have around roughly around 71-72% invested in equity and the balance is invested in the debt markets. The equity side is the alpha generator for the fund or it generates excess returns. We invest about 70 odd percent of that 71% in largecaps and the balance in mid and smallcaps. In terms of sectors, we take a very proactive approach in identifying sectors which are in the value zone, where the sector has good long-term growth prospects and trading in the reasonable value zone.
Depending on the valuations, we go overweight or underweight in the sector. So, in the current scenario, we remain quite positive on banking, especially private banking, financial services, FMCG, as well as healthcare in terms of our top sectoral bets in the current scenario. On the debt markets, our portfolios are quite conservative. We typically invest more than 90% of our portfolio across either AAA or government securities. We want to minimise the risk on the debt part of the portfolio.
Now talking about financial services and especially talking about banking, you mentioned weightage going on private banking. Any specific reading over there as to why you think this is going to be a zone where there are good picks for you?
V Srivatsa: If you look at private banking as a space, it has not performed in line with the markets over the last couple of years. This is in spite of the fact that the last three-four years' performance has been far superior than the previous three-four years in terms of better credit growth, decent amount of credit cost. We are in a very sweet spot as far as the credit quality is concerned with largely very good capital adequacy ratios. This is for both public and private sector banks, though at the current juncture, private sector banks offer a much better opportunity.
Coupled with the fact that if I look at the average valuation of the sector, it trends at around 1.85 to 1.9 times one-year forward price to book which is at a decent 10%, 15% discount to the three-year, five-year average. In fact, it is one of the very few sectors in the market today which is trending lower than the longer-term valuations that the sector is trending at. That makes a very good case to go overweight on the sector, specifically on the private banking side.
Talking about an aggressive hybrid category, how do you ensure that in your overall portfolio allocation, you do not go over-diversified? How to just make sure of that because even your fund is largely tilted towards largecap in terms of allocation in equity? How do you ensure there is no case of over-diversification because you might also be having a pure largecap fund in your portfolio whether an active or a passive way or any other market cap portfolio?
V Srivatsa: In UTI, we have various strategies. For example, the UTI Flexi Cap, the UTI ELSS or Large Cap, are all run with different strategies. So, the strategies for the UTI Aggressive Hybrid is quite different from the UTI Large Cap or UTI Flexi Cap. I run more of a relative value strategy. I focus a lot on value. So, for example, you would not find many high PE stocks in my portfolio or very high level quality stocks in my portfolio. It will be more of decent quality, but I think stocks which you can clearly identify with value, so that is a way we ensure that within UTI, the portfolios are not similar. So, you may not find aggressive hybrids, say, similar to a Large Cap or to a Flexi Cap, that is our way to ensure that there is no over-diversification here.
Also, on an investor portfolio level, how can you help them stay away from over-diversification on their personal portfolio level?
V Srivatsa: Depending on the risk profile, they probably need to design or define their asset, what would be their broad asset class as in terms of whether it is debt or whether it is equity or whether it is gold. But largely, the first starting point is that.
Second, again, a large would again depend on their ability to take risks. For example, if you are creating a portfolio for, say, a 60-year-old person, it would be wise to have a larger portfolio on fixed income, either could be in deposits or could be in mutual funds, but maybe a much smaller share and possibly a bigger share in the largecap because liquidity would be an important criteria for such people. If you go to the other end where you are designing portfolio for a young person, say, at 25, 30 years, who wants to invest for the next 20 years, you could probably go to a very high share of equity and then probably focus into mid and smallcaps because they may offer a better risk return profile over a longer timeframe.
So, the first point is to identify the investor and then, depending on the risk profile, go in for either equity, debt, within equity go in for, say, a midcap or a smallcap or a largecap, depending on the risk that they can take at that point of time and also the liquidity. If, for example, there is a demand for a high liquidity five years down the line, either you have some marriage expenses coming up or some children's education, it makes sense to go in for a more liquid type of a debt product where you can get liquidity at the time that you would want.
Any chance you can also go heavy in the midcap and smallcap category?
V Srivatsa: Roughly we have around 30-32% allocation to mid and smallcap and as a strategy we have designed it that way, that we will not exceed beyond these levels. However, if the valuations are extremely high in the mid and smallcaps, we may reduce it to 20%; but the outer cap is 30-32% and the reason being is that since we are offering this to conservative investors, a profile of our investors in this fund are conservative, we do not want to take the path of having a higher share of mid and smallcaps because they are prone to risks either in terms of volatility in their performance, volatility in liquidity, that is the reason why we have kept it that way.
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Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
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