For 2-3 days there are certain news items mentioning how certain AMCs are doing the Inter-Scheme Transfer to manage their redemption pressure in debt funds. Due to Mutual Funds Inter-Scheme Transfer – Whether Hybrid Funds risky now?
The major concern to all of the investors is what will the fate of their Hybrid Funds.
What are Hybrid Funds?
As per the SEBI recategorizition circular, there are three varients in Hybrid Funds and they are as below.
# Conservative Hybrid-
The definition is “Investment in equity & equity related instruments-between 10% and 25% of total assets; Investment in Debt instruments-between 75% and 90% of total assets”. Also, the type of scheme is mentioned as “An open-ended hybrid scheme investing predominantly in debt instruments”.
# Balanced Hybrid Fund
Definition is “Equity & Equity related instruments-between 40% and 60% of total assets; Debt instruments-between 40% and 60% of total assets. No Arbitrage would be permitted in this scheme. Also, the type of scheme is mentioned as “An open-ended balanced scheme investing in equity and debt instruments”.
# Aggressive Hybrid Fund
Definition is “Equity & Equity related instruments-between 65% and 80% of total assets; Debt instruments-between 20% 35% of total assets”. Also, type of the scheme is mentioned as “An open-ended hybrid scheme investing predominantly in equity and equity-related instruments”.
Note:-Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund.
Mutual Funds Inter-Scheme Transfer – Whether Hybrid Funds risky now?
There are many posts written that Mutual Fund Companies risking the portfolio of the Hybrid Fund investors by transferring their risky debt funds assets to hybrid funds. In such a situation, whether those investing in Hybrid Funds should feel risky or what they have to do?
# Whether Inter-Scheme Transfer is LEGAL?
Sadly it is LEGAL!. I am unable to find any such restrictions from SEBI. The last time SEBI talked about the inter-scheme transfer is with respect to the valuation of securities while transferring. But as per my knowledge, there are no restrictions for inter-scheme transfer.
Hence, you can’t question such move of AMCs.
# Inter-Scheme Transfer is NEW?
It is not new. It is happening for long. Now due to recent downgrade, default, or liquidity crunch, we are noticing such events in a BIG way.
If you go by this ET report, you noticed that it is rampant since almost 2010 (highest was during this period). It is increasing on a yearly basis. However, again during recent times, it increased drastically.
# Definition of Hybrid Funds
If you look at SEBI’s definition of Hybrid Funds, it is clear that it is just defining the asset allocation between Equity and Debt. However, deliberately or what, it is silent on what type of asset allocation the fund manager has to follow in an equity portfolio. Whether the portfolio should have a minimum or maximum allocation towards Large, Mid, or Small is not clear.
Same way, in generic SEBI, defined hybrid funds debt portion. However, it is clearly not suggesting what should be the quality of the securities and up to what extent the fund manager can take the risk. In fact, the definition is silent with respect to the Macaulay duration of the debt portfolio.
Hence, it is a complete freedom for fund manager to handle the portfolio as per his wish 🙂
# Do you think Mutual Fund Companies ACCEPT?
Data prove that there is a huge inter-fund transfer. Hence, in such a situation, do you think AMCs will come up and say you upfront that they are NOT doing this inter-scheme transfer to manage their badly hit debt funds redemption pressure?
They will not. Instead, they will tell you some more ROSY story and defend their such movement. But you have to look at whether their intention is right or wrong by the quality of the papers they are doing the inter transfer. If the securities inter transfer are low quality, obviously, there is a motive to bail out their debt funds.
# It is investors and Advisers FAULT
Many advisers and investors using Hyrbid Funds as if they are TAX-FREE SHORT TERM DEBT INSTRUMENTS. In fact, many are depending on such funds income to survive for their ongoing expenses.
Many of us considered that such funds holding around 35% debt (Aggressive Hybrid) mean it is safe and only 65% in equity is RISKY. They never understood the risk of the debt part.
Those who are in such wrong belief are now under the HIGHEST RISK. They have to think twice of what to do with Hybrid Funds. Hence, before that, they have to understand what is their purpose of investing.
Conclusion:-Yes, by opting for the inter-scheme transfer, AMCs are actually playing the games. However, within the ambit of legality. Hence, as investors, we can’t question them. By doing this inter-scheme transfer, AMCs are managing the liquidity issue of their debt funds. It is actually bad precedence. SEBI should restrict such an inter-scheme movement to bailout the AMC’s worst-hit funds at the cost of other fund investors. Let us see when the SEBI will again open its eyes on this front.
However, as an investor, think Hybrid Funds as 100% equity funds but not 65% equity and 35% debt funds. Because we can’t track the portfolio on a regular basis. Hence, use such aggressive hybrid funds only if your goal is more than 5 years and that also with proper asset allocation between debt and equity. Also, within the equity, it is foolish to rely on such category of a single fund.
Keep one thing in mind-NEVER TAKE IT LIGHTLY WHERE THE DEFINITIONS ARE GENERIC. This is what is the case with hybrid funds. Fund managers can invest your whole equity part either in small-cap, mid-cap, large-cap, or to specific sectors. Same way, he can take a risk of any level in the mad rush to generate certain alpha.
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