After the stupendous rally from the March 2020 low, equity markets are now set for a potential rise in market volatility. The spread of the Omicron variant of Covid and the unwinding of easy money policies by global central banks are expected to be among the key determinants of market movement in 2022.

Hybrid funds invest in a mix of equity and debt and modify their equity allocation based on factors such as market valuations. This ensures that the equity-debt allocation is based on rules and is not impacted by an investor’s impulsive moves in and out of equity.

Aggressive hybrid funds invest 65-80 per cent of their corpus in equity and the remaining 20-35 per cent in debt. These funds are suitable for those with an appetite for risk and an investment horizon of five years or longer. Investors can consider SIPs in Mirae Asset Hybrid Equity Fund, which is among the top performers in the category.

Like pure equity funds, aggressive hybrid funds too can deliver negative returns over short periods of time. Given their high equity exposure, these funds are taxed as equity funds.

Mirae Asset Hybrid Equity Fund was launched in July 2015 and is among the top return generators in the aggressive hybrid fund category. The scheme’s large-cap bias in equity and focus on high credit quality in debt make it a good investment for those with a high risk appetite.

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Performance record

Over the last five years, the aggressive hybrid fund category has generated on average, three-year return of 7.9 per cent and 5-year return of 13.7 per cent (both CAGR). Compared to this, Mirae Asset Hybrid Equity Fund has generated respective returns of 10.3 per cent and 15.3 per cent. Only funds with at least five years of history have been considered here.

The scheme has provided good downside protection and has captured market upsides as well. This can be gauged from the scheme’s downside capture ratio (DCR) and upside capture ratio (UCR) calculated with reference to the Sensex TRI. The lower the DCR and higher the UCR, the better it is. The scheme had a DCR of 69 per cent versus 52-85 per cent for the category and an UCR of 76 per cent versus 59-81 per cent for the category, based on last five years’ data.

Strategy and portfolio

The scheme typically invests 70-75 per cent of its net assets in equities and follows a bottom-up approach to pick growth businesses available at reasonable valuations. As of November-end 2021, the scheme had around 50 per cent of its net assets in large-cap stocks, 11 per cent in mid-caps and under 7 per cent in small-caps. The remaining 32 per cent was largely in debt and some cash. Sector-wise, the scheme has always held a diversified portfolio. As of November-end 2021, the top five sectors in the portfolio — banking, software, petroleum products, finance and auto — accounted for 40 per cent of the scheme’s net assets.

Also read: Should you invest in ICICI Pru Passive Multi-Asset FoF?

In debt, the scheme has always been mostly invested in the highest credit quality debt papers —government securities and AAA rated corporate bonds. As of November-end 2021, only 2.6 per cent of the scheme corpus was invested in below AAA-rated debt papers. This percentage has been even lower in the past.

While the core debt portfolio is managed using accrual strategy, tactical duration calls too are taken to benefit from the changing interest rate cycle. The modified duration of the scheme has ranged from 2.4 to 6.0 years over the last five years, indicating that the scheme is not immune to interest rate risk (falling bond prices when interest rates rise). However, the reduction in the modified duration over the past year in line with expectations of a rate hike by the RBI should help the scheme weather interest rate risk to an extent. From a high of 4.5 years in December 2020, the scheme brought down its modified duration to 3.2 years by November 2021.

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