Factor funds and Target Maturity Funds can stabilize your mutual fund portfolio

Many investors are looking at passive funds now. The increased AUM in these schemes is a proof of investors interest in the new and upcoming passive funds in equity as well as debt mutual fund space. Vikash Wadekar, Head-ETFs, Mutual Fund and Bhushan Kedar, Director, Funds & Fixed Income Research, Limited, discussed how investors can create a stable and alpha generating portfolio, at the Cafe Mutual Passives Conference, in Mumbai.

The experts suggested target maturity funds and factor funds as a great way to balance your active mutual fund portfolio. Bhushan Kedar said that debt passive funds are seeing an increase in SIP investments which are not common in debt space. This indicates a longer term commitment in these funds. These experts believe that factor funds solve the problem of downside protection in equity while generating alpha and TMFs also do the same in debt space.

Building a portfolio around index funds isn’t really settling for average but not believing in magic, quoted Vikash Wadekar. Wadekar pointed out that equity passive funds are good for investors who don’t want to make many choices in their portfolio, they want to spend less time and energy and keep it simple. “In your core portfolio- you should have common and time tested investment, like multicap, largecap index funds. Satellite represents the smaller portion, that’s where you can take extra risk. There is a lot of thought going to underperformance in bigger companies so cut that out and choose passive schemes in their areas,” says Wadekar.

On the debt side, passive funds are about Rs 5lakh crore market now. Bhushan Kedar explained how the market got here and how far it can go. “We got here on the back of risk aversion in investors’ minds after 2018. That was the starting point for debt passive funds. The risk appetite in debt is lower and hence the strategies launched earlier were g-sec based. The point is also to replicate FDs in mutual funds and that’s where target maturity funds came in. These products score over FDs on basis of capital gains and yields. Comparing them to active debt funds like medium and long duration points, the expense ratio is around 100-150 basis points compared to Target Maturity Funds with 10-15 basis points expense ratio. That’s a big edge,” said Bhushan Kedar.

Factor funds also became famous in the last two years. Experts believe that factors have a potential to beat the market. “Factors are passive strategies but can generate alpha. Factors use a mathematical model based on investor behavior. This not only increases your chances of outperformance but also covers downside. 15-20% allocation to factor funds can give your portfolio a lot of edge,” suggests Vikash Wadekar.


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