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In the recent Financial Bill, the government’s tax proposals have made many categories of funds unattractive for investors. Debt and gold funds, as well as conservative hybrid schemes, will no longer enjoy indexation benefit. Nor will there be any distinction between long- and short-term capital gains. All profits will be taxed at the applicable slab of an investor.
Even so, a few select conservative hybrid funds can be considered by conservative investors as these have delivered double-digit returns over the medium as well as long term. On a post-tax basis, these funds would still comfortably deliver more than the prevailing inflation rate. And these are schemes with low risk.
Market regulator SEBI’s mandate means that conservative hybrid funds can invest only 10-25 per cent of their portfolio in equity and equity-related instruments, while 75-90 per cent must be parked in debt securities.
Kotak Equity Hybrid can be considered by conservative investors with a three- to five-year time horizon. It has delivered above-average returns consistently and has been among the best in its category. Investing lump-sums may be a good idea in the case of conservative hybrid funds. But investors with a modest risk appetite can consider SIPs (systematic investment plans) for goals that are around five years away.
Kotak Debt Hybrid has been among the top few funds in its category. When three-year rolling returns over the 10-year period from July 2013 to July 2023 are taken, the fund has delivered an average of nearly 10.9 per cent. This return places it above peers such as HDFC Hybrid Debt, Canara Robeco Conservative Hybrid, Axis Regular Saver and UTI Regular Savings.
In any three-year rolling period over the last 10 years, the fund has not given negative returns.
Also, Kotak Debt Hybrid has delivered more than 10 per cent over three-year rolling periods nearly 60 per cent of the time in the last 10 years and more than 8 per cent nearly 83 per cent of the time.
On five-year rolling returns over June 2013 to June 2023, again, the fund has delivered a robust 10.2 per cent on an average.
The fund is benchmarked to the CRISIL Hybrid 85+15 - Conservative Index and has managed to beat it over 90 per cent of the time on a rolling five-year basis over the last 10 years.
Over the long term, if such funds do manage to give more than 10 per cent returns, even those in the 30 per cent slab may find the returns quite attractive enough to beat inflation.
Kotak Debt Hybrid ensures that the equity allocation in the portfolio stays at 24-25 per cent across market cycles. The fund takes a multi-cap approach to choosing stocks in the portfolio. Though dominated by large-caps (around 15 per cent), there is allocation to mid- and small-caps as well, usually around 4-5 per cent each. This approach ensures participation in broader market rallies.
There is a diffused approach to stock selection and very few companies have more than 1 per cent allocation.
In a conservative hybrid fund, the main returns come from debt, and equity plays the role of a sweetener and provides a kicker to overall returns.
On the debt side, Central government securities dominate the holdings. Sovereign dated securities are the key holdings of the fund. The G-Sec maturing in 2033 and a government floating rate bond (FRB), also maturing in 2033 are top debt holdings of the fund.
There are select holdings in State government bonds as well. Then, there are AAA-rated corporate debt securities of public sector firms – NABARD, SIDBI, REC, PFC and IRFC. Debt securities of private companies such as HDFC and Bharti Telecom also figure in the portfolio. Therefore, there is hardly any credit risk taken by the fund in any of its holdings and are quite safe. The debt portfolio’s net average maturity is around 7.54 years, which suggests that the fund is betting more on the mid to the longer end of the yield curve. Kotak Debt Hybrid’s net modified duration is relatively reasonable in terms of interest rate sensitivity, at 3.75 years.
Published on July 28, 2023
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