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The many tax tweaks and other measures announced in the Budget have elicited mixed reaction in the market. While tax on buybacks by listed companies and measures to increase public float augur well for investors over the long run, short-term jitters on higher surcharge on the super-rich and more tax burden on FPIs, are likely to keep markets volatile.
Hybrid funds that invest a portion of assets in equity and debt are ideal in such fickle markets. For investors with a horizon of over five years, taking notable exposure to equity can help build wealth over the long run. Aggressive hybrid funds — categorised by SEBI as having 65-80 per cent investment in equity — are a good option. The higher allocation to equity helps deliver superior returns while also offering the tax benefit available to equity funds. The 20-35 per cent debt exposure helps cap losses in iffy markets.
ICICI Prudential Equity & Debt Fund — erstwhile ICICI Prudential Balanced Fund — has been a steady long-term performer in this category. Over three- and five-year horizons, the fund delivered around 11 and 12 per cent returns, respectively; over a much longer 7- and 10-year time period, it raked in a tidy 15 per cent return.
Portfolio moves
Sound calls across market cycles have helped the fund deliver handsomely. In the 2014 rally, for instance, the fund upped its equity exposure to 68-70 per cent. In the so-so market of 2018, the fund kept its equity exposure to 65-67 per cent through most of the year. Its active churn of portfolio between mid- and large-caps also boosted returns.
In the 2014 rally, the fund had split its equity assets equally between large-caps and mid- and small-cap stocks, which helped it cash in on the rally. With markets losing steam in 2015, the fund started increasing its exposure to large-caps. Since the start of 2018, as mid-caps started to overheat, the fund increased its exposure to large-caps to around 85-87 per cent (of total equity).
Over the past one year, the fund has increased exposure to SBI, Infosys, and ICICI Bank which paid off well, as these stocks rallied handsomely. Exiting stocks such as Tata Motors, Thomas Cook and Hindustan Zinc, appear to have helped cut losses, as these stocks plummeted over the past year.
As of May, the fund’s top sectoral holdings include private sector banks, power (chunk in NTPC), and software. Investments in stock such as ICICI Bank, SBI and L&T, should pay off over the next year, if growth in the economy picks up. The fund’s investments in sturdy companies such as Titan, ITC, Infosys, ONGC etc, should help it weather interim gyrations in the stock market better. The fund holds about 85 per cent of its equity in large-caps, which offers comfort.
On the debt side too, the fund has juggled deftly between long-term government securities and other debentures, depending on the interest rate movement in the economy. In the lacklustre 2017 and 2018 markets, the fund reduced exposure to G-Secs; in most of 2018, the fund’s investments in G-Secs have been 6-7 per cent and under. The average maturity of the debt portfolio has been one to two years since the beginning of 2018.
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