NFO Review: Union KBC Asset Allocation Fund-Moderate Plan
Jun 12, 2012

Author: PersonalFN Content & Research Team

Union KBC Asset Allocation Fund – Moderate Plan (UKAAF-MP)

An open-ended hybrid fund aiming to take advantage by investing in debt, equity and gold.

Summary

Type	An Open-ended Hybrid scheme	Benchmark Index	30% S&P CNX Nifty (+) 55% CRISIL Composite Bond Fund Index (+) 15% CRISIL Gold Index
Min. Investment: Additional Purchase: 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	Face Value	Rs 10 per unit
Entry Load	Nil	Exit Load	0.50% < 6 months Nil thereafter
Issue Opens	June 04, 2012	Issue Closes	June 18, 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 can be no assurance that the investment objective of the scheme will be achieved.

(Source: Scheme Information Document)

Is this fund for you?

A Debt oriented hybrid fund diversifies its portfolio of assets across different asset classes. However, as the name suggests the major portion of the portfolio assets is allocated towards the debt asset class. Investing in debt asset class through various short, medium and long term debt instruments gives the fund the income generating capability or a source of regular income.

But to give a further push to the overall returns of the portfolio, such hybrid funds are given a dash of equity and equity related instruments. Equity as an asset class has the capability to give inflation-beating returns over the long term. Hence, the inclusion of equity in the portfolio of assets becomes imperative. However, investors need to keep in mind that though this asset class provides a zing to returns of the portfolio, it comes at a price called ‘risk’. Equity asset class has the characteristic of being highly volatile in turbulent times.

Last but not the least, apart from the income generating capability and high returns a fund also requires stability in its portfolio. Thus, to infuse stability, a part of the portfolio is dedicated towards gold via gold Exchange Traded Funds (ETFs). And interestingly, gold has a low or negative correlation with most other asset classes.

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 – Moderate Plan (UKAAF-MP) 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 the launch of the fund seems quite appropriate as interest rates have almost peaked out and the equity markets too aren’t showing any major positive signs of a turnaround. UKAAF-MP is positioned to invest across all classes of debt and money market instruments with no cap or floor on maturity, duration or instrument type concentrations. The fund will dynamically manage the portfolio maturity profile based on the current market condition. Equity investments too, will be actively managed while the investments in gold through gold ETFs will qualify on the basis of quantitative and qualitative parameters set in the investment process.

Portfolio Strategy

While investing across various asset classes UKAAF-MP will cater to the investors with a moderate risk profile. The fund house may launch, whenever it deems fit, more independent Plans with different percentage allocation to all the three asset classes.

The investments in high quality debt instruments will be guided by fundamental research and analysis, ratings assigned by domestic credit rating agencies, macroeconomic factors. In addition, the investment team of the AMC will carry out an internal in-depth credit evaluation of securities proposed to be invested in.

The equity allocation will be actively managed and the fund will follow a bottom-up stock selection approach. The investment team shall also scan the market for opportunities and shall evaluate the individual companies on their merits, leading to the bottom-up investment decision.

The gold portion will be managed by investing in Gold ETFs of other mutual funds available for subscription in the Indian market. UKAAF-MP will invest in Gold ETFs which qualify the quantitative and qualitative parameters set in the investment process.

Asset Allocation Pattern

Asset Class	Allocation Range	Risk Profile
Equity and Equity related instruments	20%-40%	High
Debt & Money Market	40%-60%	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-MP, Mr Ranawade also manages Union KBC Equity Fund and Union KBC Tax Saver Scheme.

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-MP, Mr Agrawal also manages Union KBC Dynamic Bond Fund.

Fund Outlook

Given the asset allocation pattern of the fund, UKAAF-MP is positioned as a multi-asset fund for an investor with a moderate risk profile. This is reflected in capping the equity exposure of the fund to a maximum of 40%. 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 flexibility to shift the debt exposure across maturity depending upon the interest rate scenario with an aim to generate regular income for the investors. Gold ETFs on the other hand will provide the much needed stability to the portfolio arising from the volatile equity markets.

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

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