When i started my investment journey through mutual funds, I was quite worried about the risk in equity investments as I post graduated in 2009 just after the worst financial crisis in decades. The only reason I got hooked to equity investing in last decade, was due to Hybrid Funds. Hybrid funds have a mix of equity and debt which gives them the slight more protection against the sudden draw downs (decrease in value) in equity markets. You can opt for Hybrid Debt fund or Hybrid Equity fund, today we will try to understand about hybrid equity funds. What these funds offer and what to expect from them along with our screening of the fund category. let’s start with the disclosure that the below funds are not a recommendations but the broad comparison of the funds in same category to help us shortlist the consistent funds. Selection of a fund in your portfolio is dependent on lot of other factors including your asset allocation, time horizon and risk profile.
What are Aggressive Hybrid funds? What is their risk & return profile?
As per the latest SEBI guidelines, Equity & Equity related instruments between 65% and 80% of total assets; Debt instruments between 20% – 35% of total assets. An open ended hybrid scheme investing predominantly in equity and equity related instruments.
The CAGR return for the category has been in range of 8-9% over the last 3 years given the slowness in equity segment for last couple of years. Over 5 years, funds have performed decent with average returns of 9-10%. If Nifty valuations stays high and earning growth does not return the returns might stay in the similar ranges or lower range over next 1-2 years nevertheless it is better than our existing Fixed deposit rates. (Read: Lessons from Nifty History). Also, They tend to be on par or slightly less volatile then pure equity funds but superior in terms of lower max draw down (Read: Offence & Defense in Investing).
Who & when should we invest in these funds?
If you are new to equity investing and still have not figured out your asset allocation, risk appetite etc and still you are afraid of equities, this is probably the fund category to start with for you. Though the ask is that you should hold your investments for at least 4-5 years, even though it does not guarantee the good returns but the chances of loss will be very small. If you have a long investment horizon (5-7 years+), and can stomach some volatility of returns then this category can also be part of your core portfolio (Read: Core & Satellite Portfolio).
Even though it is a hybrid fund with mix of debt and equity, do not consider this as a replacement of your FDs or Debt funds which is often portrayed in market by lot many people. They do behave as equity investments and are volatile in nature.
Which are the best funds in this category?
Looking among the fund with at least 5 yrs of history and >100cr of AUM. Here are my Top picks in no order of preference.
- SBI Hybrid Eq Fund
- ICICI Pru Eq & Debt Fund
- Canara Robeco hybrid Eq
Data is as of Nov 8th, Source: Value Research, Moneycontrol & Morning Star
Obviously the above table is just to screen the key funds to analyse and can reduce your list to a small universe. Below chart shows you the range of historical returns each of our top 3 picks, Returns are annualized calculated on a rolling basis for a 5 year investments during last 15 years period. (Used Regular funds returns for longer historical data) Canara Robeco has a higher mean return, better worst scenario return as well as higher possible return, while it is more volatile vs ICICI Pru Eq & Debt fund but here the volatility is good.
Those of you who hold the funds other than suggested, if your fund is in the top 5-10 of the category you can continue to hold it or think of opting from one of the Top 5 based on your preference. Do write to us for your feedback, queries and suggestions. if you like it, don’t forget to subscribe it. Read more category reviews: Large-cap fund, Multi-cap fund, Small cap fund, Value funds
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