On the fringes of the more volatile mutual fund schemes, there lie a set of schemes that I am tempted to describe as ‘yo-yo funds’. Why? Because of the way that their NAVs swing up and down, like a yo-yo. All too often, their NAVs rise sharply one day, and then fall sharply the next day, or vice versa. Thus far, all such schemes that I have seen are closed-end equity/ hybrid schemes, and a key common link to their NAV fluctuations is their exposure to long-term derivatives contracts. In this post, I propose to shine a bit of light on these schemes. In doing so, there are three things that I hope to accomplish.
The first is to create awareness about the existence of ‘yo-yo funds’. In conversations that I have had with advisors and investors, most of the people that I spoke to, could not believe that the NAV of any mutual fund scheme could fluctuate in such a way. The second is to caution those considering investing in closed-end equity and hybrid schemes that are likely to have exposure to long-term derivatives contracts. Such NAV fluctuations are something that they could well encounter, and they should be willing to accept that. The third is to reinforce the point on volatility which was the heart of my last post. I believe that fund houses need to be more sensitive to the impact that volatility can have on investors, even in closed-end schemes.
To keep things simple, I’ll focus on two such schemes. I’ll present some numbers on their NAV fluctuations, as also the visual evidence of charts. Both are 3-4 year closed-end equity schemes, but with different benchmarks, and managed by different fund houses. Both schemes were launched in July 2017. To be clear, my choice of these schemes is not related to what I feel about their fund houses. These are good examples that can help in reflecting upon the problematic existence of ‘yo-yo funds’.
HDFC Equity Opportunities Fund-II-1100D June 2017
Benchmark: Nifty 50
Launch Date: 12 July 2017
Maturity Date: 20 July 2020
The chart below shows the NAV movements of the scheme since its inception. It also gives a sense of the frequent swings that made me regard this as a ‘yo-yo fund’. It may be instructive to compare those swings with the movement in the value of the benchmark at those times.
The table below summarizes the extent of daily fluctuations in the NAV of the scheme, relative to its benchmark index.
| Fund | Benchmark | |
|---|---|---|
| Max rise on a single day | 4.2% | 1.2% |
| Max fall on a single day | -4.3% | -1.6% |
| Standard Deviation (daily returns) | 36.5% | 11.8% |
| % of days on which swing in excess of +/- 3% | 23% | Nil |
| % of days on which swing in excess of +/- 4% | 5% |
Nil |
Data period: 17 July 2017 to 15 Dec 2017
Data/ information sources: HDFC MF, NJ India Invest, NSE, Value Research
ABSL Resurgent India Fund – Series 4
Benchmark: S&P BSE 200
Launch Date: 7 July 2017
Maturity Date: 6 June 2021
As with the previous scheme, the chart below shows the NAV movements of this scheme since its inception. You may notice that the NAV swings in the case of this scheme (relative to the previous scheme) are much more pronounced. This is also borne out by the data in the table below the chart.
| Fund | Benchmark | |
|---|---|---|
| Max rise on a single day | 5.7% | 1.3% |
| Max fall on a single day | -6.0% | -1.9% |
| Standard Deviation (daily returns) | 44.5% | 12.6% |
| % of days on which swing in excess of +/- 3% | 23% | Nil |
| % of days on which swing in excess of +/- 4% | 16% |
Nil |
Data period: 17 July 2017 to 15 Dec 2017
Data/ Information sources: ABSL MF, Asia Index, Value Research
Both these schemes hold Nifty put options, evidently for the purpose of hedging. There are some who argue that such hedging is necessary to protect investors in the schemes, and that the volatility should be seen in that context. There are others who suggest that the volatility is mostly on account of the lack of depth in the derivatives market, and that it is unfair to blame fund houses for that. To me, though, these arguments overlook/ bypass a more fundamental question: what is the compulsion to launch closed-end equity schemes, particularly those with maturities of 3-4 years?
