Thread by @passivefool

Timely piece by @lonelycrowd and @VarshBohra on less discussed Franklin fiasco in hybrid and asset allocation fund of funds. Once again, it's the debt portion of the portfolios that have gotten investors in trouble.
prime.economictimes.indiatimes.com/news/75723252/…

Very little has been said about the shenanigans in hybrid funds. Hybrid funds are supposed to reduce volatility and give aa a smoother ride to investors. While most investors focus on the equity slice of these funds and rightfully so given that it's the most volatile part

All the risks have shown up in the debt part which is the more boring part. It's just absolutely stupid that AMCs have taken credit calls in hybrid funds. I really don't get the logic. Jacking up return by 1% when there's equity in the portfolio, how stupid is that?

It's just absurd at how terribly debt funds have been managed, especially from the top 10 AMCs, which are about 70-80% of the industry assets.

Debt funds have created more side pockets than the pocket in all my pants pt together, and I have many many pants.

First, the categorization of Hybrid Funds as a whole is a terrible joke. Get this - there are 2 categories called Balanced Hybrid and Balanced Advantage. I mean, how the hell do investors navigate that? It doesn't make sense.

A Balanced Hybrid is basically 65/35 which is fine. A Balanced Advantage Fund, on the other hand, is a do whatever the hell you want fund - 0-100 equity or debt. How the hell is that balanced? That's mis-labelling! And then there are Equity Savings funds - oh my lord this is -

another useless category. These funds mix equity debt and arbitrage and have performed shamefully. You would've been better off in a pure arbitrage fund for the same performance with wayyyy less volatility. Past 3 years performance of some top Eq savings fund vs an arbitrage fund

That chart doesn't even consider the crash. What the hell is the use of this category? There's about 11,500crore in the category. Useless investment by investors. I hope they are proud of themselves.

Hybrid funds are sold as alternatives to equities. Almost equity-like returns but with more stability and safety. But it turns out AMCs have been stuffing these funds with junk papers. Take the case Nippon India hybrid whose NAV fell double digits in a single day after it

sidepocket Yes Bank exposure - it had said YESS to those AT1 bonds. And then there's the question of how balanced are balanced funds? Not very, by the looks of it, have to dig deeper.

I think the debt slice of hybrid funds and arbitrage funds require a very close examination. People have taken this for granted assuming that hybrid funds are safe and I think, we've seen enough blowups that have proven that notion wrong.

These shenanigans are one the reason why I rail against active funds. It's not worth taking the fund manager risk. I wish Indian debt markets have more index debt products. But even today, you can combine a low-cost index equity fund with a product like the Bharat Bond fund.

But there's a trade-off with tax implications. But the costs work out extremely lower. The shenanigans have also proven wrong the notion that sticking funds from the top 5-10 AMCs is safer. Most of the credit shenanigans have been from the top AMCs.

Someone asked this question - If an investor has to do all the diligence of analyzing funds and monitoring it, what the hell is paying the fund manager for?

Fair question.