Mutual Funds

BNP Paribas Conservative Hybrid Fund: Good pick for conservative investors

Maulik Madhu BL Research Bureau | Updated on March 20, 2021

Not all schemes in the category are truly conservative

Investors with a lower risk appetite and wanting to take a small exposure to equity can invest in conservative hybrid funds. Going by SEBI’s categorisation norms, conservative hybrid funds must invest 75-90 per cent of their assets in debt instruments and the remaining 10-25 per cent in equity.

This, however, does not lead to funds in the category being truly conservative. Conservatism is also a function of the credit quality of the debt portion, especially since debt (including cash) must form at least three-fourths of a scheme’s portfolio.

While a high percentage of low-credit-quality papers may drive returns, it may make the scheme unsuitable for a conservative investor.

BNP Paribas Conservative Hybrid Fund can be a good choice here.


About the fund

The scheme was launched in September 2004 and has been among the top performers in the category. Going by last five years’ data, the scheme has typically held 55-70 per cent of its corpus in debt, 10-27 per cent in cash, and around 20 per cent in equity.

As of February-end 2021, the fund held 64 per cent of its assets in AAA and equivalent-rated and sovereign debt papers. Such papers have accounted for 40 per cent (and over) of the scheme’s net assets since May 2019. The fund has also had virtually no exposure to papers rated below AA- over the past several years. ICICI Prudential Regular Savings Fund, the top performer in the category based on returns, has had higher exposure (9-19 per cent, last two years) to below AA- rated papers.

In equity, BNP Paribas Conservative Hybrid has always had a large-cap focus with a well-diversified spread across sectors. As of February-end 2021, of the 23 per cent exposure to equity, 18 per cent was held in large- cap stocks.

Banking and finance, and software were the key sectors.

Good performance

Compared with the one-year and three-year average rolling return of 8.7 per cent and 8.4 per cent, respectively, of the category, BNP Paribas Conservative Hybrid has generated 9.6 per cent and 9.4 per cent (all CAGR), respectively, over the past seven-year period.

The scheme has also provided good downside protection during this time.

Compared with many peers, BNP Paribas Conservative Hybrid has had no instances of negative one-year return over this period. Also, only 2 per cent of the time has the three-year return (CAGR) been below 6 per cent.

Actively managing its duration in line with the changing interest-rate cycle and macro-economic view have helped the scheme fare well. From 8.4 years in 2016, the average maturity of the scheme went down to 1.7 years in 2018, and then to 2.6 years in 2020. As of February 2021, the average maturity was at 4.38 years.

In November 2016, the average maturity was at a high of 9.98 years. This came at a time followed by two 25-basis point rate cuts between October 2016 and August 2017. Then, between April and September 2019, the average maturity was upped from 2.15 to 4.25 years. While the rate cuts had begun in February 2019 itself, they continued until May 2020.

Today, given the uncertainty over future interest- rate action by the Reserve Bank of India, the scheme’s debt portfolio is heavily titled (40 per cent) towards G-Secs, the most liquid segment of the debt market.

Another 10-12 per cent is held as cash. This, according to the fund manager, will give it ample flexibility to modify its portfolio as also leave scope for tactical duration calls as the interest-rate scenario changes.

Published on March 20, 2021

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