Asset allocation schemes yet to gain traction among mutual fund investors

Asset allocation schemes — which offer diversification between equity and debt — in the same fund are yet to gain traction among mutual fund (MF) investors. Industry experts and advisors say lack of investor understanding and instances of mis-selling had impacted investor sentiment on asset allocation 

strategies. 

According to data from Association of Mutual Funds in India (Amfi), asset allocation categories have seen net outflows of Rs 6,714 crore in the current financial year. Experts say investors are yet to understand that these funds are not to be compared with performance of equity schemes, given the debt component within an asset allocation strategy.

“Hybrid fund categories are not too well understood by investors. Most investors tend to think of these as equity schemes and expect equity-like returns from them,” said Vidya Bala, an independent MF expert.

The balanced advantage category – which dynamically manages between equity and debt allocation – has seen over a dozen schemes getting launched since the Securities and Exchange Board of India (Sebi) formalised the category in October 2017. However, several schemes in the category are yet to gain more than Rs 1,000 crore of investor assets.

“It is surprising that the asset allocation space is yet to see wider investor participation. Fixation with equity is one of the hurdles, as investors believe that equities tend to deliver outsized returns than debt. However, that is not always the case,” said S Naren, chief investment officer of ICICI Prudential MF.

ICICI MF’s balanced advantage fund manages assets of Rs 27,955 crore, which accounts for close to one-third of the investor assets in the category. The fund house introduced the fund in 2013, before the category was created. Barring the balanced advantage category that saw some investor inflow (Rs 3,260 crore) in current financial year, investor interest has remained lacklustre for other asset allocation categories. 

The conservative hybrid category has seen net outflow of Rs 1,665 crore, while balanced schemes (which take higher exposure to equity) have seen Rs 8,647 crore of net outflows in current financial year.

Industry observers say that positioning of balanced schemes as regular dividend-paying schemes by certain pockets of the market had also contributed to dampening of investor sentiment on hybrid funds. 

“Despite the complex nature of these products, they were made to look like simple regular-income products. However, this is not the case anymore and the real nature of the product needs to be understood,” Bala added.

In the current financial year, balanced schemes have seen the biggest drawdown among asset allocation categories.

Experts added that if investor expectations are set right at the beginning, the category can make a significant contribution to MF industry’s growth.

“We believe the asset allocation category has the potential to be as large in size as the equity mutual fund category,” Naren added.

Equity schemes currently manage assets to the tune of Rs 7 trillion, while the overall asset allocation category manages close to Rs 3.5 trillion of assets.