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Balanced mutual funds, also called hybrid mutual funds, help investors mitigate the volatility during uncertain market conditions.
For instance, in the current market turmoil amid the Covid-19 pandemic, the aggressive hybrid mutual funds category has delivered a negative return of 11 per cent year-to-date, while the large-cap mutual funds plummeted 17 per cent. The equity market bellwether index, the Nifty 50 TRI, declined 18 per cent during the same period.
As mandated by SEBI, aggressive hybrid funds allocate 65-80 per cent to equity, while the rest is invested in debt instruments.
The higher allocation to equity helps deliver superior returns. These funds are treated like equity funds for taxation purposes. Debt exposure helps cap losses in market downturns.
Superior returns
The schemes under the aggressive hybrid fund category depreciate less during market corrections and appreciate less during rallies compared with other equity-oriented categories. Lower volatility results in delivering superior risk-adjusted returns similar to equity-oriented categories over the long term.
The accompanying chart shows that long-term investments made in aggressive hybrid funds, equity large-cap funds and the Nifty 50 TRI have generated identical returns over long run. This analysis is based on the 10-year rolling returns (CAGR) from the past 20 years’ NAV history.
The risk or the volatility, as measured by the annualised standard deviation (SD), shows that aggressive hybrid funds category has an SD of 16.8 per cent while, the same stood at 20.8 per cent for the equity large-cap funds category.
Meanwhile, the Nifty 50 TRI has an SD of 21.9 per cent. SD is a statistical tool that tells you how much the return from your mutual fund is straying from the expected return, based on the fund’s historical performance. We calculated the annualised SD from the past five years’ NAV history.
Here, we present three aggressive hybrid funds that have been selected based on their performances, especially in bear phases, over the past 10 years. Performance during bull phases and the ranking of the fund in BusinessLine Portfolio Star Track MF Ratings were also considered.
They are suitable for investors with medium risk profile and an investment time horizon of at least five years.
SBI Equity Hybrid
The fund has been consistently delivering above-average returns since its launch.
Performance, as measured by the five-year rolling return calculated from the past seven years’ NAV history, shows that the fund delivered a compounded annualised return (CAGR) of 12.6 per cent, while the category clocked 10 per cent. The Nifty 50 TRI generated a CAGR of 10.5 per cent.
During the equity market downturn in 2015 and the period between September 2018 and October 2018, the fund contained the fall well by delivering negative returns of 8 per cent and 8.5 per cent, respectively, while its category corrected 12 per cent and 10 per cent, respectively.
Its performance in the current fall (January-June 2020) has been relatively better as the fund lost 13.5 per cent while the category was down 14.3 per cent.
The scheme mostly maintains two-thirds of its equity portfolio in large-caps and the rest is mid- and small-cap stocks. The debt portion is managed with a combination of credit, interest-rate and duration calls.
In most periods, one-third of the debt portfolio is deployed in high-yielding credit instruments.
Canara Rob Equity Hybrid
Canara Robeco Equity Hybrid is one of the low-volatile funds in the category with annualised SD of 15.2 per cent (for the category, it is 16.8 per cent), and has generated better risk-adjusted return over the long run. Performance, as measured by the five-year rolling return, shows that it has delivered a CAGR of 12.4 per cent.
It delivered mediocre returns during 2016 and 2017, given its allocation to some troubled sectors, including pharma and software. However, the fund made a comeback in 2018, and ranks among the top five, thanks to its strategy of increasing allocation to debt assets. In the current turmoil (January-June 2020), it has corrected only 8.6 per cent. The category slumped has 14.3 per cent.
The fund follows a multi-cap approach. On the debt side, the fund follows a blend of accrual and duration strategies. It is one of the few schemes in the category investing only in the highest-rated debt instruments.
ICICI Pru Equity & Debt
The fund has been a steady long-term performer in the category.
Performance, as measured by the five-year rolling return, shows it has delivered a CAGR of 12.3 per cent.
Sound calls across market cycles have helped the scheme deliver handsomely.
In the 2014 rally, for instance, the fund upped its equity exposure to 70 per cent. In the iffy market of 2018, it kept its equity exposure to 65-67 per cent.
Its active churn of portfolio between mid- and large-caps also boosted returns.
Its performance in both bull and bear paces in the past has been decent. However, in the current market correction (January-June 2020), the fund has lost 16 per cent, while the overall category has managed to withstand by correcting 14.3 per cent. This can be attributed to certain stocks in its portfolio, such as ICICI Bank, NTPC, ONGC, Vedanta and Hindalco Industries, which were hit badly in the current market correction.
It has a well-diversified equity portfolio. 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.