Birla Sun Life Medium Term Plan Alters Its Investment Pattern. Should You Stay Put?

Birla Sun Life Medium Term Plan (MTP), a flagship debt scheme by India’s fourth largest Asset Management Company by AUM, underwent a material change in its asset allocation structure and investment pattern recently. As of February, 28th 2017, MTP holds Rs 9,888 crores worth of assets.

Until recently, MTP functioned more as a “credit opportunities” debt fund, implying that it aimed to generate returns by identifying mispriced credit opportunities and counting on a narrowing of the yield gap. With double digit 3 and 5 year returns of 10.25 per cent and 10.42 per cent respectively, MTP has been a solid performer thus far, finding a place in the core portfolios of many a seasoned fixed income investor.

On March 27th this year, BSLAMC announced that it would be taking an exposure of up to 10 per cent into REIT’s (Real Estate Investment Trusts) and InvIT’s (Infrastructure Investment Trusts) in its Medium Term Plan. With the recent budget allocating a chunky 3.96 lakh crore towards infrastructure development, opportunities are likely to widen in this space this year.

InvIT’s are SEBI regulated instruments that mimic the structure of Mutual Funds. The moneys pooled in by an InvIT are directed towards the infrastructure projects that are clubbed under it. InvIT’s can invest into these projects, either directly or through a special purpose vehicle (SPV), and are required to undergo a complete valuation and published their NAV’s (Net Asset Values) on a bi-annual basis.

Earlier this year, SEBI had permitted Mutual Funds to take a constrained exposure to InvIT’s. “A mutual fund may invest in the units of REITs and InvITs. No mutual fund under all its schemes shall own more than 10 per cent of units issued by a single issuer of REIT and InvI”, it had notified on 15th February 2017.

A circular released by BSLAMC to its clients stated: “Birla Sun Life Trustee Company Private Limited has approved the proposal to make investments in the units of Real Estate Investment Trust & Infrastructure Investment Trust by Birla Sun Life Medium Term Plan with effect from Wednesday, April 12, 2017, subject to applicable investment limits”. The document later goes on to specify that this limit is 10 per cent of the portfolio, furthermore stating the risk of the instrument to be “medium to high”. Overall, the fund has now been classified as “moderate risk” by the AMC.

Since infrastructure projects are funded through a mix of debt and equity, the risks associated with InvIT’s comprise of credit risk as well as price risk. A SEBI circular clarifies that “InvITs shall invest at least 65 per cent of net assets of the scheme in equity shares of companies in line with Equity Oriented Mutual Fund schemes”, implying that invIT’s by themselves have an asset allocation not dissimilar to equity oriented hybrid funds.

With the freefall in yields getting arrested and credit opportunities drying up off late, MTP has presumably taken this step to bolster its chances of continuing its double-digit return record of accomplishment, which could now be at risk with a pure debt oriented strategy.

In lieu of the proposed change, existing investors have been granted the option to exit the fund without paying a load, on or before 11th April, 2017. If you’re holding units in this fund, should you take it up?

The correct decision would depend upon your unique risk profile and investment objectives. If it’s a pure debt fund you’re looking for, you should obviously exit. However, if you’re open to exploring new investment avenues to generate inflation beating returns from your portfolio, you should stay put in the fund. The relative opacity of InvIT’s notwithstanding, they do offer a high degree of comfort, given that we have a highly capable regulator at the helm of affairs in the form of SEBI. In addition, since the maximum allocation to InvIT’s and REIT’s have been capped at 10 per cent, even a catastrophic failure will likely not lead to capital erosion. BSLAMC’s track record of robust risk management and due diligence should be considered as well.

All in all, it’s a bold step, and it’ll be interesting to see whether or not other AMC’s follow suit with their debt schemes too. Investors should be alert to incoming communications, so that their portfolios continue to stay in sync with their risk tolerance levels.