Let us talk about the category selection first because Balanced Advantage and Dynamic Asset Allocation is a category that is already well-known and has a very good interest from the investor’s perspective as well. But then what is going to be different about Quant’s Dynamic Asset Allocation Fund?
Yes, this category is quite big but what we are bringing to the table uniquely is that for the first time, we are launching a fund which has the 100% flexibility in shifting from debt to equity. We can have 100% equity exposure based on the risk-on or risk-off environment. We can have 100% debt exposure also. The industry has been running this product very differently. Most of the people are trying to take tax advantage and then they offer arbitrage.
I personally believe that by doing that, you are killing the spirit of the product. a)If you really look at it, in the last one year, arbitrage has given hardly any returns – about 4.5% annual returns. Look at the scenario where if for whatever reason, the market comes down, the futures have started quoting a discount and you will land up losing some capital.
So apart from opportunity loss, real loss can happen where this product is with 0-100% flexibility. Yes, it becomes a debt taxation but it gives me huge flexibility too and is one of the only schemes where Sebi allows us to exit 100% from the equity or even participate 100% in the debt. So it is a unique product and we are trying to respect the product on two aspects.
The way it has been designed that for this particular scheme, we want to optimize it and we are very excited. It is a great opportunity and gives us flexibility and adds value to the way we manage money in a very dynamic manner. This product is more apt for us and we can really demonstrate the dynamism between equity and debt.
Talking about the exclusivity of this fund that you just mentioned and highlighted, given the current times, what kind of an investor should be buying this kind of a fund? Also, what kind of placement do you think they should have in their portfolio with the existing exposure diversification?
Actually, we are trying to target a new audience itself. We are looking at the people who predominantly invest money in a low risk profile and predominantly invest money either in bank FDs or the private sector companies FDs. The whole thesis revolves around that they do not like any volatile product and that is the reason despite the taxation not being in their favour, they still look for safety and that is one of the reasons by offering this product, we are trying to generate extra alpha over FD returns. We can offer you a similar low volatility product with better taxation.
If I am an investor with a 3-5-year perspective, it is a far superior product. We can steer such new investors towards the mutual fund industry and when their risk aversion gets diluted, they can look for other products also. We are trying to look for a new category of investors apart from the existing one and we are very confident that this is a very low volatility product for our traditional risk-averse investors.
When we talk about low volatility products and additional instruments like fixed deposits, the concern is stability and security more than generating alpha because the investor is clearly risk averse and is not comfortable with an asset class like equity. Talking about the kind of offering you have, how will you generate alpha?
In the current, relatively risk-off environment, if I have to run this product, we will say it is a completely dead product and whenever we see opportunity in the equity market, we will try to capitalise and quickly go back towards debt.
But also look at other scenarios. March or April 2020 is another important scenario, where we saw the risk appetite collapse significantly but liquidity was higher. It was a good time or extreme in the equity market and that could be an opportunity where we can say 100% exposure towards equity is the beginning of a new cycle.
Similarly, in September 2021, saw the peak of the easy phase of bull run getting over. We saw an extraordinary money flow towards global equity cycle peaking out. Maybe at that point in time, we will exit 100% from equity and move from equity to 100% debt. Those are the two extreme scenarios. In between, we will try to optimise. The whole idea is that if we can deploy the money and are not even willing to take a duration risk, we will take only a duration call when it is on the extreme end.
So either the beginning of the interest cycle or when we believe it is the peak of the interest cycle, we can play duration products. In the current scenario, we would like to play with the shorter duration products or the money market instruments and at an appropriate time, when we see an opportunity, any special situation in the market or any extreme opportunity.
Every three to five years, we get such an extreme opportunity in the equity market. But if I go and take this concept to the next level and talk stock specific, let us say the most liquid names, 150 or Nifty 100 or Nifty 200 stocks, which since we are talking about low volatility products, maybe 20-30-40 times, one can get such an opportunity in a year and we like to optimise that opportunity and play for a shorter duration, generate some alpha and then go back to the debt market again.
That is the way we will generate alpha and preserve capital. We become opportunists to play in the market. Otherwise, in this environment, run it as a debt product. Keep on splitting the alpha and that is the way can generate maybe FD plus type of return.
What is the tax treatment on this fund? What kind of return expectation should investors have in say a period of three years?
We very clearly mentioned that we have chosen a debt path as a debt taxation but we are also looking at the investor. If somebody is coming from a 3-5-year perspective, over a period of time, over a longer duration, the differential between debt and equity comes down significantly.
If one has a five-year horizon for this product which we run as a debt product, the differential between the treatment is just 60 bps or 66 bps, which is not very meaningful. But being 100% debt sometime helps me in bringing down volatility which is not the case if you run it as a quasi-equity product or continue to maintain certain exposure on the equity side.
