‘Investors must temper returns expectations from hybrid funds’

Our Bureau Chennai | Updated on October 23, 2020

(Clockwise from left) Kaustubh Belapurkar, Director, Manager Research at Morningstar India: S Haresh, Zonal Head – South, ICICI Prudential Mutual Fund, with Aarati Krishnan, Editorial Consultant, BusinessLine, at the webinar

Hybrid funds work well for first-time investors wary of equity volatility, says Belapurkar

Following SEBI’s re-categorisation of mutual fund schemes, the hybrid funds category now spans a diverse range of schemes from arbitrage funds to aggressive equity funds.

To help investors decode hybrid funds, ICICI Prudential Mutual Fund and BusinessLine jointly hosted a webinar ‘Hybrid Mutual Funds – Dissected’, as part of their SMART Investor series on October 22.

Kaustubh Belapurkar, Director, Manager Research at Morningstar India and S Haresh, Zonal Head – South, ICICI Prudential Mutual Fund, shared their insights on the category, and the session was moderated by Aarati Krishnan, Editorial Consultant, BusinessLine. Belapurkar highlighted that hybrid funds can help investors adhere to a suitable asset allocation plan by automating the process of rebalancing.

However, investors need to temper their return expectations from these funds today, given the low interest rate environment, both globally and in India.

He suggested aggressive hybrid funds (65-80 per cent equity) as a suitable option for investors who have a minimum investment horizon of five years.

He said these funds also work very well for first-time investors wary of equity volatility.

Long-term plan

Haresh of ICICI Prudential Mutual Fund talked about how equity markets can deliver in the long run, but given their volatility, hybrid funds help investors avoid impulsive shifts between assets at the wrong times.

To a question on how much weight investors must attach to the expense ratios of hybrid funds which were upwards of 2 per cent in some cases, Belapurkar replied that costs were important but not the primary filter one must apply for fund selection.

On the question of whether it was desirable for investors to rely on the dividend options of categories such as aggressive hybrid funds for regular income, Belapurkar said that investors should be aware that dividend distributions in funds come both out of income and capital gains.

In categories like aggressive hybrid funds, which suffer drawdowns during market falls, investors may be withdrawing from capital for dividend payouts.

Therefore, equity savings or conservative hybrid funds are a better choice for regular income-seekers.

Haresh highlighted the benefits of the more tax-efficient systematic withdrawal plan instead of a dividend plan for this purpose.

On what investors must look for when choosing a hybrid fund, Belapurkar cited the fund’s overall equity exposure, its market-cap bias and historical allocation as factors, apart from duration risk and credit risk in debt funds.


Published on October 23, 2020

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