J P Morgan has launched its India Equity Savings Fund, which Supreet says offers the power of 3 : growth potential, income and tax efficiency. For a nation of conservative savers that wants a small slice of equity action, but the tax efficiency of an equity fund, going all the way up the risk curve to a Balanced Fund may not be ideal, says Supreet, and this is where the JPM India Equity Savings Fund can be a handy option. Read on as Supreet explains how the fund proposes to offer all the 3 attributes of growth, income and tax efficiency through asset allocation across equity, fixed income and arbitrage.

WF : "Equity Savings" as a term is not yet popular in our market. What is the key customer proposition that such a product seeks to offer and who would be the target investor?

Supreet : Short answer - Moderate Risk profile investors seeking to beat inflation with minimum volatility.

Since the tax changes this year, these investors are either taking more risk than they can tolerate and investing into Balanced Funds or are taking no risk and booking Fixed Deposits. As you can see (please refer to the chart below) from the calendar year returns of various benchmarks, the Balanced Fund Benchmark volatility is very close to that of an Equity Fund Benchmark like BSE 200. In years like 2011, when BSE 200 was down 27% Balanced Fund Benchmark was down 14.4%. If you look at the Diversified Benchmark Portfolio (a representation of our strategy), the volatility is much lower and in fact even in a year like 2011, it was down only 2.5%.

WF : Your fund will seek to invest across equity, fixed income and arbitrage. Is the allocation to arbitrage driven primarily by tax considerations or is there a strong case for this asset class as a diversifier?

Supreet : Arbitrage funds in the industry have been in existence for 15 years. If you look through that period, you will realize that arbitrage returns are usually in excess of the Repo Rate. Therefore, arbitrage opportunities will aim to provide regular income in the portfolio and in doing so will also provide stability. The added advantage is the tax efficiency that is a desirable by-product of equity and equity related investments.

WF : In what ways is this product superior to an MIP, which the market is familiar with?

Supreet : Let's take an example, say an advisor was to do asset allocation for his client himself. He allocates 30% in a Diversified Equity Fund with an annual expense of 2.5% and 70% in a Short Term Income Fund with annual expense of 1.1%; the composite expense in such a case will be 1.52% annually. JP Morgan India Equity Savings Fund's expense ratio is currently intended to be capped at 1.5%* annually which is in line with the above example. Additionally, the dividends and long term gains from the fund are tax exempt. On the other hand, MIPs charge 2.25% expense on what is predominantly a Fixed Income Portfolio and is tax inefficient (for a period of less than 3 years as per current tax structure).

WF : Will your asset allocation across equity and arbitrage be dynamic, considering you have significant latitude from a tax point of view? How will you decide the allocation of your 65% in equity oriented investments?

Supreet : The equity allocation will vary from 20% to 35% of the portfolio. If the markets trade at a big premium to its 10 year average valuations, we will be closer to 20% in equities. Conversely, if the markets become significantly cheap relative to its 10 year average, we will be closer to 35% invested in Equities. Given that today we are just in line with that average, we will tend to be right in the middle of that range.

WF : How will the long only equity portion of the fund be managed? Is there a cap or theme bias for this portion?

Supreet : The equity management will be Multiple Capitalization strategy. While there will be a strong bias towards large cap stocks that tend to offer better risk adjusted returns, the fund manager can take calibrated positions across our best midcap ideas.

WF : How will the debt component of the fund be managed? Will you look to capture upsides from duration or will you focus more on accrual?

Supreet : The role that fixed income will play in this fund is to generate income and provide stability. To that end, the fund manager will focus more on accrual in the short term debt space.

WF : There is a concern that as more money comes into arbitrage funds, returns will get significantly compromised. How valid is this fear?

Supreet : It's perhaps valid for a pure arbitrage fund and more so for short term investors in these funds. As far as JPMorgan India Equity Savings Fund is concerned, since the allocation to arbitrage will vary approximately from 30% to 45%, the number of stock ideas in the portfolio will be far lesser than the number of ideas required for a 100% arbitrage fund. Additionally, the pool of money seeking arbitrage positions in this fund will be far smaller than that of a pure arbitrage fund. That gives us the ability to be nimble footed and take positions more swiftly than a pure arbitrage fund can.

One must also recognize the reality that if the returns from arbitrage fall below the risk free rate for prolonged periods of time, money will move out of these trades into these risk free rate instruments thereby de-crowding this space. As a result of this de-crowding, opportunities from arbitrage can spring up again and the whole cycle of the trade getting crowded and then de-crowded repeats itself. Therefore you will see periods of very strong returns followed by low returns followed by strong returns…. and so on. If one has a medium to long term view these highs and lows smoothen out to give a reasonably good arbitrage return to investors.

WF : What in your view is the most compelling investment argument for this differentiated product?

Supreet : The below three points summarize my view:

1. Potential for growth - The equity portion has the potential for growth by participating in the long term prospects of Indian equities

2. Income with relative stability - Aims to provide regular income from fixed income investment portion of the portfolio and is relatively stable

3. Tax efficiency - The Fund is treated similar to equity funds for tax purposes and has the potential to deliver better post-tax returns at a similar level of risk compared to hybrid/ MIP funds

Disclaimer: *Subject to change from time to time but it will be in line with the Scheme Information Document. The opinions/views expressed herein are the independent views of the interviewee and are not to be taken as an advice or recommendation to support an investment decision. The information included in this document has been taken from source considered as reliable; JPMorgan Asset Management India Pvt. Ltd. cannot however guarantee its accuracy and no liability in respect of any error or omission is accepted. These materials have been provided to you for information purposes only and should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. The information contained in this document does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security, investment product or service. Investment involves risk. Past performance is not indicative of future performance and investors may not get back the full amount invested. As an investor you are advised to conduct your own verification and consult your own financial and tax advisor before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

JPMorgan India Equity Savings Fund (An Open-Ended Equity Scheme)

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