The recent decision by the Securities and Exchange Board of India (Sebi) to allow asset management companies to invest their residual allocation, besides investment in pure equity, freely among gold/silver, InvITs and debt securities is likely to lead to a higher allocation to commodities and infrastructure asset classes in pure equity funds. While aimed to provide a better asset mix to investors, the market regulator’s move has also raised concern in sections of the industry.
Active vs. Passive Dilemma
An AMC CEO requesting anonymity said that the increase in allocation to other asset classes will potentially make all active equity funds multi-asset funds while on the other end, passive funds will be able to replicate their benchmark and remain pure equity schemes. While he thinks that only time can tell whether this leads to increase in popularity of passives over actives, he added that this move can lead to active equity funds to become too diversified, in terms of of asset classes. He also expressed doubt on whether many active fund managers will like to use this option of increased allocation for the same reason.
Performance Benchmarking
Madhu Nayar, MD and CEO, Union Mutual Fund points out that there has not been any mention on updation of benchmarks for pure equity schemes. He believes that if pure equity schemes are allowed to have a higher allocation in other asset classes, then schemes which get a performance boost due to investment in them and beat their pure equity benchmarks may create a false sense of alpha generation and outperformance among investors.
Others like Swarup Mohanty, Vice-Chairman and CEO, Mirae Asset Managers says that in the recent years, majority of asset allocation of domestic investors has been in equity due to a rally in the markets post-COVID. He further adds, “The allocation in debt has also been minimal for many investors in recent years. In such a scenario, increase in allocation in gold/silver of pure equity funds may lead to a multi-asset core portfolio among investors, which will increase the probability of investors making median returns. “
He added that it is important for investors to remember that equity is not the only asset class which can provide growth, commodities can do that as well while providing diversification. While mentioning the benefits, Mohanty acknowledged that performance attribution may become difficult for investors due to higher allocation in multiple asset classes.
Sharing a similar positive view on the regulator’s move, Sumit Bhatnagar, Fund Manager – Equity, LIC Mutual Fund said that increase in investment in gold and silver could be positive for mutual fund investors due to their historically low correlation with equities which could reduce overall volatility and provide a hedge against inflation, currency depreciation and geopolitical uncertainty, thereby providing better risk-adjusted returns over a long term.
While the mutual fund houses reflect on the benefits and limitations of the new regulations and the ways to implement them, the final verdict on whether the regulations succeed in achieving their objectives will rest in the hands of investors.