The markets have been in a corrective mode over the past month or so as a result of several global events such as the US Treasury yield spiking to record levels, Israel-Hamas tensions in West Asia and the selling spree of foreign investors.
From an asset allocation perspective, the high yields on bonds domestically and volatile equities may be a good time to consider hybrid funds. Conservative hybrid funds would be suitable for low-risk investors looking to play it safe in the markets, yet being able to get reasonable returns that beat inflation. These funds can be useful additions for important financial goals that are 3-5 years away that cannot be risked with permanent loss of capital.
Market regulator SEBI mandates conservative hybrid funds to invest 10-25 per cent of their portfolio in equity & equity related instruments, while 75-90 per cent must be parked in debt securities.
HDFC Hybrid Debt fund can be considered by conservative investors as it has been a consistently above-average performer in the category. Investors may either look to add small lump-sums over a period of time or start a systematic investment plan in the fund.
HDFC Hybrid Debt has been around for nearly 20 years – earlier as HDFC MIP Long-term earlier. The fund has generally been able to deliver double-digit returns over 3-5-year periods.
When three-year rolling returns over the 10-year period November 2013 to November 2023 are taken, the fund has delivered an average of 9.6 per cent. This return places it above peers such as Axis Regular Saver and Franklin India Debt Hybrid.
In any three-year rolling period over the last 10 years, the fund has not given negative returns.
HDFC Hybrid Debt has delivered more than 10 per cent over three-year rolling periods nearly half the time in the last 10 years.
When point-to-point compounded annual returns are considered, the scheme has given a robust 10.3 per cent over the last 10 years. It has generally been in double-digits across timeframes. The fund has outperformed the category average by 1-2 percentage points.
Even SIP returns (XIRR) are quite healthy at 10.3 per cent over the past five-year period, according to data from Valueresearch.
All gains from conservative hybrid funds are fully taxed without indexation at the slab applicable to you. However, at 9-10 per cent return levels, select schemes from the category still remain attractive.
A safe blend
The fund usually allocates 22-25 per cent of its portfolio to equities across market cycles.
HDFC Hybrid Debt invests almost its entire equity portion in large-cap stocks. Most of the picks are from the Nifty 50 and Nifty 100 indices. Allocation to individual stocks is low, usually around 1 per cent. The equity part is thus a reasonably moderate on risks and focused on delivering a kicker to the debt portfolio.
The debt portion consists of non-convertible debentures (NCDs), sovereign and state government securities. Government securities account for 15-20 per cent of the overall portfolio. Currently (September 2023) it is at a little less than 20 per cent. Bonds and NCDs are the main holdings in the debt part and usually take up 50 per cent or more of the overall holdings.
These NCDs are both from public sector institutions and private companies. Most are rated AAA, though the fund also invests a small portion in securities rated AA as well.
Power Finance Corporation, IRFC, HDFC Bank, Bajaj Finance, Sikka Port & Terminal, Tata Motors and SIDBI are among the key bond holdings.
While investing in securities rated AA, HDFC Hybrid Debt ensures exposure to reputed names or conglomerates. Thus, the credit risk is quite low in the debt portfolio.
The fund manages its debt maturity profile actively. It has increased the maturity profile from 4-5 years to beyond 6 years over the past one year. Modified duration, which measures the change in bond prices due to change in interest rates, of 3.67 years is relatively reasonable in relation to portfolio sensitivity to interest rate changes. The Macaulay duration is acceptable at 3.9 years. The fund holds cash and net current assets of 5 per cent or higher in recent years. Cash equivalents are at 6.1 per cent in its September portfolio. The yield to maturity is healthy at 7.64 per cent.
Overall, the portfolio is a healthy blend of debt and equity that are low on risk with potential for above-average returns.