ICICI Prudential Equity Income Fund (IPEIF) has more than doubled its AUM in the last six months, and for good reasons. The Fund's philosophy makes it an excellent option for the moderate risk investors who are in a quandary, after deposit rates have fallen precipitously in the same period. With its unique investment philosophy, IPEIF provides investors with a chance to achieve double-digit returns without taking on excessive risk. Launched in December 2015, IPEIF's assets stand at 1,248 crore on last count.
Fund BasicsIPEIF is a hybrid fund that leans heavily towards fixed income securities and hedged equities (in the same way that arbitrage funds do). It invests 60% to 80% of its holdings into debt and arbitrage opportunities, and the remaining 20% to 40% of its portfolio into equities. The fund uses an in-house Price-to-Book Value Model to manage gross equity exposure, meaning that it reduces equity exposure as markets go up and increases it as markets fall - but unlike its cousin ICICI Prudential Balanced Advantage Fund, it doesn't go beyond 40% into equities, meaning that it functions as an aggressive debt oriented hybrid fund at its riskiest.
Multiple sources of AlphaIPEIF generates 'alpha' or outperformance from three sources. First, by going against the grain of the markets in a sense; by employing a dynamic asset allocation strategy that is contrarian in nature. Second, through prudent stock selection, the way a diversified equity fund would -Power Grid, Hindustan Zinc, and Oil India are three high alpha cases in point. And third, by actively moderating the modified duration of its debt portion, thereby making the most of yield fluctuations. One of the Fund's key premises is the fact that equity rallies pick up pace after rate cut cycles are completed, at which point it will presumably aim to max out its equity exposure within it's the bounds of its mandate, and move out of high duration bonds and focus on accruals.
IPIEF's ability to actively manage its duration is highly visible. In Jan-15, it's modified duration stood at less than 2.5, and it was raised steadily to 3.75 by Feb-16, as yields were expected to fall. By Oct-16, the modified duration was as low as 1.54, and this cushioned the blow when yields suddenly spiked a few months later, causing heartache for many fixed income investors who were invested in longer term debt funds.
The Fund's best 12-month performance came during the year preceding Feb 27th, 2017, during which time it delivered an outstanding return of 21.28%. It's worst 12-month performance was -4.27% in the period between Feb 27th, 2015 and Feb 29th, 2016.
Who is it suitable for?Any investor looking to park moneys for a 3-year horizon could consider investing into IPEIF. Alternatively, retired individuals could allocate a portion of their moneys into this fund and generate regular income from it through SWP's (Systematic Withdrawal Plans). Since exit loads apply only when one redeems more than 10% of their units, a 12 month-plus SWP from this fund would be load free and highly tax efficient (as only the profits earned on the units being liquidated would attract a short-term capital gains tax of 15%). Since the Fund attracts equity taxation, even dividends received from it would be tax free.Additionally, first time investors with a longer time horizon - but who approach mutual funds with trepidation and skepticism - would gain comfort from the unique mix of stability and potential for inflation-beating returns that IPIEF possesses. Do bear in mind that the fund can hold between 20% and 40% into equities though, and so investors who are completely risk averse or want zero exposure to volatile asset classes should give it a pass.