Understanding Multi-Asset Investing
Investing across asset classes usually works for individuals in the medium to long term. In some cases, investors want to leave the decision of asset allocation to a fund manager and in others, investors may want a fund manager to build a diversified portfolio which contains a mix of stocks and bonds. While the former gives a fund manager absolute freedom to decide how much she should allocate to each asset class, the latter stipulates some minimum allocation to each asset class, limiting the fund manager’s flexibility.
Among specialised investment funds (SIF) an Active Asset Allocator Long-Short Fund gives flexibility toinvest across asset classes without any restrictions. Hybrid Long-short fund (HLSF), however, is a vehicle stipulating fund managers to allocate to a mix of stocks and bonds by introducing asset classspecific thresholds.
What Is a Hybrid Long Short Fund?
HLSF is a long-short strategy that offers a portfolio with minimum 25% allocation each to stocks and bonds. Rest of the money can be allocated according to a fund manager’s discretion. At the same time the scheme allows a fund manager to go short up to 25% of the scheme’s assets. For beginners, shorting a security means selling one that one does not own, with an intention to buy it back later using derivative instruments. A fund manager can short sell a stock or a bond on which he has a bearish view.
Portfolio Construction and Investment Flexibility
To put it simply, the scheme is structured in such a manner that a fund manager can buy a stock or bond of his choice where he has a constructive view. There are no restrictions in terms of the size of a company – large-mid-small – when it comes to building equity components and there is no restriction in terms of – credit rating or the duration – of the bond while building fixed income components of the portfolio. This flexibility is good enough for a fund manager to curate a portfolio that is expected to deliver over the medium term.
In a bearish market or in sectors where a fund manager expects poor performance, the scheme allowsshorting. This way a fund manager can make money on both -bullish and bearish – trades,providedshe gets her view right.
Role of the Fund Manager in Performance
The role of a fund manager is important in such an investment strategy. With the help of a long-short portfolio invested in a mix of stocks and bonds a fund manager can generate healthy risk-adjusted returns over medium to long term. The structure of the scheme is such that an investor gets exposure to both – stocks and bonds under one vehicle and need not work on deciding and rebalancing the portfolio’s asset allocation.
Market Conditions and Expected Outcomes
HLSF is expected to deliver in all market conditions – bearish, bullish as well as sideways moving. For an investor with a long-only portfolio built using mutual funds, an HLSF will be an effective diversification. Short positions can make money for HLSF and help cut losses on long equity components of a portfolio in a bear market. Though the long-short strategy is expected to contain downside, there is a fair chance of muted performance compared to a long-only equity or aggressive mutual fund scheme in a raging bull market.
Minimum Investment and Accessibility
Compared to the minimum investment of Rs 50 lakh for portfolio management service (PMS) and Rs 1 crore for an alternate investment fund (AIF) the minimum investment for HLSF stands at Rs 10 lakh. The investment can increase allocation over time by using systematic investment plans as well as lumpsum investments. This ensures investors’ convenience.
Taxation on Gains
Depending on the asset allocation, the gains booked by selling units of HLSF held for more than 24 months are taxed at the rate of 12.5%, which is far lower than the slab rate of the investor. If a fund manager maintains more than 65% equity exposure then the 12.5% rate of tax will be applicable for gains booked after 12 months.
Who Should Invest in a Hybrid Long Short Fund?
Investors should consider allocating money to HLSF after building their core portfolio after factoring in their asset allocation according to their financial goals. Investments in HLSF can be an effective starting point for most investors contemplating investments to SIF – the emerging product segment in the Indian mutual fund industry. Take exposure with a minimum five to seven years view so that a fund manager gets to perform over at least one market cycle. Ideally keep adding to the investments using systematic investment plans.
Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.