Mutual Funds

Your Fund Portfolio

Anand Kalyanaraman | Updated on December 01, 2019 Published on December 01, 2019

What is the difference between equity hybrid and equity savings schemes, and which one is better? Last year, I had invested ₹3 lakh each in HDFC Equity Savings and Kotak Equity Savings mutual fund schemes. However, I find that both these schemes have fared badly. Should I exit from them? If yes, where should I invest so that after a year I can start systematic withdrawal plans (SWPs) to get regular returns to meet my day-to-day requirements? I am a retired senior citizen, but a long-term investor.

RK Gaur

As the name suggests, hybrid mutual fund schemes invest in a combination of assets — equity, debt, gold and arbitrage opportunities — depending on their mandate.

As per SEBI categorisation norms, hybrid schemes are of the following categories 1) conservative hybrid (75-90 per cent to be invested in debt instruments and 10-25 per cent in equity instruments) 2) balanced hybrid (40-60 per cent each in equity and debt) 3) aggressive hybrid (65-80 per cent in equity and 20-35 per cent in debt) 4) dynamic asset allocation (dynamic investment limits in equity and debt) 5) multi asset allocation (minimum 10 per cent each in at least three asset classes, say equity, debt and gold) 6) arbitrage (following arbitrage strategy) 7) equity savings (investing in equity, arbitrage and debt; minimum 65 per cent in equity, and minimum 10 per cent in debt).

In general terms, ‘equity hybrid’ could refer to aggressive hybrid funds that have at least 65 per cent of their corpus in equity and related instruments and are considered equity funds for taxation purposes.

In equity savings schemes, at least 65 per cent of the corpus is allocated to hedged and unhedged equities, and the rest to debt assets. The arbitrage strategy is used to take advantage of the price differentials in various market segments such as cash and futures market. Derivatives can help hedge positions and reduce volatility of returns.

The choice among hybrid schemes depends on the risk appetite and the return expectations of the investor. For instance, equity savings schemes may be more suitable for those with a relatively lower risk appetite and moderate return expectations, while aggressive hybrid schemes may be more suited for those with a medium risk appetite and relatively higher return expectations.

The average annualised return of 23 funds in the equity savings category has been 7-7.3 per cent over the past one to five years. HDFC Equity Saving and Kotak Equity Saving funds, in which you have invested, are among the better-performing funds in this category, from a longer time-frame perspective (about 7.6 per cent annualised over five years). You could continue with one of these schemes if your objective is to earn moderate returns with relatively low risk. But if you are seeking higher returns, you could consider shifting to well-run aggressive hybrid schemes or pure equity schemes that come with higher risk, and could offer better returns. Please see our fund ratings tables for high-rated funds.

You can go SWPs on any scheme — equity, debt, hybrid, solution-oriented or others. It’s best to go for growth plans and opt for the SWP after the minimum holding period, which will make the gains long-term and optimise tax treatment (more than 12 months for equity-oriented funds and more than 36 months for non-equity oriented funds).

Also, it’s a good idea to calibrate withdrawals such that the rate of withdrawals is less than the rate of capital growth in the fund; this will help conserve the corpus in the fund. For a detailed story on hybrid funds, please read - https://tinyurl.com/balanced-fund

Send your queries to mf@thehindu.co.in

Published on December 01, 2019
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