More often my advise, to the new investor, has been to use the aggressive hybrid funds (earlier named Balanced funds) as their first equity funds. Aggressive hybrid fund category is also been advocated by me to be part of your core portfolio. In most of the recommended mutual funds lists over the years, ICICI Prudential Eq & Debt has been an integral part. Though in last couple of months, it has received lot of attention for the said transfer of lower quality bonds from credit risk funds to hybrid fund. Recently in the Mint 50 list of mutual funds, it was replaced by another fund. Similarly, another most followed mutual fund site VRO has dropped an star from this fund to make it a 3-star fund. Since I also had this fund in my list of pick in the aggressive hybrid funds, Some of you reached out to me to share my point of view on this fund. I will share my point of view from the perspective of fund profile, historical performance, peer comparison and future expectations.
The original fund was launched in Nov 1999. In little over 20 years, the 10,000 invested in the fund would have grown by 12.62x with a CAGR or 13%+. To compare, the pure equity index Nifty 50 TRI returns over the same period are ~10% only. Aggressive Hybrid fund is the example of much touted 60-40 strategy of investing that it works. The fund has the expense ratio of 1.2% and has the 2nd highest AUM of 17,600+ crore in the Category. Currently fund is managed by two of the prominent fund managers in India Manish Bhatia & S. Naren. Both the fund managers bring their combined investing experience of 40+ years.
Lets dive down to see if not this fund that what are our alternatives. I compared the funds in aggressive hybrid category with at least 5 years of history & 100 cr of AUM. The top pick Mirae Asset Hybrid has an advantage of lower expense ratio over other funds, helping it to give better returns. Though it is gaining the AUM and the expense ratio would normalize back to average in category of 90bps, the fund might succumb to lower performance. Though our top picks from last round in 2019 Canara Robeco Hybrid & SBI Eq Hybrid continues to be the performer with lower draw downs. Even though the performance of the ICICI Pru Eq & Debt has dropped but it continue to be in the top half of performers.
Lets talk about its approach, This is one of the only fund in the aggressive fund category which has a higher bend towards value style vs others. Value as a category is currently a more prudent approach given all the questions about valuations and stress in economy. Will it help in out-performance? only future will tell, we will see.
Regarding the debt investment, where the most noise about the fund holding majority of debt portion in AA rated papers. Is that really risky? From credit risk perspective, it is risky. If you take a closer look, unrated paper is an InvIT. InvIT in current environment a great source of stable income. Most of the other papers are from Banks & PSUs which are psuedo goverment backing. Yes there are couple of bonds to question about, though 1% swing in a equity fund is like any other day. One thing which very few people notice or talk about is the duration of the debt fund portfolio. ICICI Pru has the modified duration of <2years vs other funds with duration of 3-5 years, This is very well positioned for the end of rate lowering cycle. If the interest rates risk over next 2-3 years, other funds will have the -ve impact.
All in summary, If you are a new investor and still about to start your investments then take a pick between Canara Robeco Eq Hybrid or SBI Eq Hybrid. If you are knee deep in this fund already, then there is no need to jump of the ship and your patience/ loyalty would most probably be awarded suitably. Keep investing!