Union KBC Asset Allocation Fund - Conservative Plan (UKAAF-CP)

An open-ended debt oriented fund which also aims to invest in equity and gold

Summary

Type	An Open-ended Hybrid scheme	Face Value	Rs 10
Min. Investment: Additional Investment: SIP	Rs 5,000 and in multiples of Re 1 Rs 1,000 in the multiples of Re 1 Min Rs 1,000 for 12 month SIP; Rs 3,000 for quarterly SIP	Benchmark Index	20% S&P CNX Nifty (+) 70% CRISIL Composite Bond Fund Index (+) 10% CRISIL Gold Index
Entry Load	Nil	Exit Load *	0.50% < 6 months Nil thereafter
Issue Opens	December 03, 2012	Issue Closes	December17, 2012

Investment Objective*

The primary investment objective of the scheme is to, “generate capital appreciation by actively investing in a diversified portfolio of Equity and Equity Related Instruments, Debt and Money Market Instruments and Gold Exchange Traded Funds. However, there is no assurance that the investment objective of the Scheme will be achieved.”

*Source: Scheme Information Document

Is this fund for you?

It is a Debt oriented hybrid fund which aims to diversify its portfolio across different asset classes. However, as the name suggests the major portion of the portfolio will be invested in debt instruments. Investing in debt asset class through various short, medium and long term debt instruments would enable fund to generate regular income through coupons and may also give it opportunities of making capital gains if interest rate scenario is favourable.

But to give a further push to the overall returns of the portfolio, the fund also aims to invest in equity and equity related instruments. Inclusion of equity as an asset class would enable the fund to provide capital appreciation to its investors. Lastly, investing in gold acts as hedge since gold shares low to negative correlation with both debt and equity.
A negative or low correlation means that the price changes in gold are independent of price changes in other asset classes like equity and debt.

Union KBC Asset Allocation Fund – Conservative Plan (UKAAF-CP) is one such debt oriented hybrid fund from the stable of Union KBC Mutual Fund. Union KBC Mutual Fund is relatively a new player in the Indian mutual fund industry (it launched its first mutual fund scheme, an equity diversified one on May 20, 2011.

The timing of launch seems fairly appropriate as interest rates have already peaked out and may start moving southward in calendar year 2013. This would provide many trading opportunities in debt. Since majority of the corpus will be invested in debt instruments, debt market conditions would largely affect the return potential of the fund. On the other hand, we are in a sideways equity market and currently trading near the upper end of the trading band. In last 3 months, Indian equity markets have rallied sharply but at current levels they are one of the most expensive markets in the world. Speaking about gold, weaker rupee still makes gold attractive and as a result fund may benefit if buying interest reemerges in gold.

Portfolio Strategy
The fund will invest in debt, equity and gold in different proportions but weightage of any individual asset class will be within the pre-specified range. Investment in all three asset classes will be managed actively with an intention of maximising returns. While investing in debt, the fund will be mainly guided by macro-economic factors and ratings assigned by independent rating agencies; in addition to in depth analysis carried out by the fund house. As far as equity portion of the portfolio is concerned; stocks will be selected following bottom up approach wherein companies are shortlisted based on their fundamental strength; rather than that of the sector they belong to. With a sole purpose of hedging, the fund may also invest in derivatives such as futures and options. Gold, as said earlier, would act as a portfolio hedge. The fund may invest in gold through Gold ETFs floated by other fund houses. However, only those ETFs which satisfy the preset quantitative and qualitative parameters would be shortlisted for investment.

Asset Allocation Pattern

Asset Class	Allocation Range	Risk Profile
Equity and Equity related instruments	15%-25%	High
Debt & Money Market	55%-85%	Low to Medium
Gold Exchange Traded Funds	0%-20%	High

(Source: Scheme Information Document)

Fund Manager Profile

The fund will be managed by the duo Mr Ashish Ranawade and Mr Parijat Agrawal.

Mr. Ashish Ranawade is the Chief Investment Officer at Union KBC Mutual Fund. He is a Bachelor of Engineering (Electronics) and has also done his Masters of Management Studies (Finance). He has over 16 years of experience in fund management. Prior to joining Union KBC Mutual Fund, he has been associated with UTI Asset Management Company and ING Investment Management (India) Limited.

Apart from managing UKAAF-CP, Mr Ranawade also manages Union KBC Equity Fund Union KBC Tax Saver Scheme and Union KBC Asset Allocation Fund- Moderate Plan.

Mr. Parijat Agrawal is the Head – Fixed Income at Union KBC Mutual Fund. He is a Bachelor of Engineering (Electronics & Communications) and has also to his credit PGDBM (IIM – Bangalore). He has over 15 years of experience in fund management. Prior to joining Union KBC Mutual Fund, he has been associated with SBI Mutual Fund as Head – Fixed Income with responsibilities of Portfolio Management of Fixed Income and Hybrid Funds, State Bank of Mauritius Limited with responsibilities of managing the entire Treasury functions of the Bank and SUN F&C Asset Management as Fund Manager responsible for Portfolio Management of Fixed Income and Hybrid Funds.

Apart from managing UKAAF-CP, Mr Agrawal also manages Union KBC Dynamic Bond Fund and Union KBC Asset Allocation Fund-Moderate Plan.

Fund Outlook

Given the asset allocation pattern of the fund, UKAAF-CP is positioned as a multi-asset fund for an investor with a conservative risk profile. This is reflected in capping the equity exposure of the fund to a maximum of 25%. Moreover, under the debt allocation since there is no cap on the maturity of the debt papers to be held, the fund manager will have a flexibility to switch across different maturities depending upon the interest rate scenario and liquidity conditions in the system with an aim to generate regular income for the investors along with capital gains. Gold ETFs on the other hand will provide the much needed stability to the portfolio arising from the volatile equity markets and falling rupee.

Thus, theoretically the fund is well placed to benefit from the three asset classes debt, equity and gold.

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