Hybrid mutual funds are usually pitched when there is a high possibility of volatility in the equity asset class, or to lure risk-averse investors uncomfortable with high exposure to pure equities. But with many hybrid funds having a 65-80 per cent equity exposure, thanks to the obsession with the equity taxation aspect, many hybrids are ‘off-balance’.

Sensing an opportunity here, WhiteOak Capital Mutual Fund has floated a new fund offer (NFO) - ‘WhiteOak Capital Balanced Hybrid Fund’, which will allocate 50:50 in equity and debt, with a pre-determined rule for rebalancing. The NFO closes on October 19, 2023. Should you invest? Here is a review. 

Need for real balance

It is well-known that equity provides higher wealth creation opportunities in the long term, while debt provides stability to the portfolio. Combining both assets in a hybrid fund brings you the best of both of worlds, right? No, not all hybrid funds are made equal. According to ACEMF data, aggressive hybrid funds have 72 per cent equity exposure, balanced advantage funds 68 per cent equity allocation, and dynamic asset allocation funds about 65 per cent equity portion. Such levels of equity mean the associated volatility in portfolios will be relatively high, in stark contrast to investor expectations for low volatility.

Is there a category with lower equity allocation? Yes, conservative hybrid funds have an average 22 per cent of equity, which again may be considered really low by investors looking for a nice balance. Enter: balanced hybrid category. These offerings are mandated to maintain 40-60 per cent investment in equity and debt. Strangely, this category has only 1 existing fund (360 ONE Balanced Hybrid Fund launched recently).

WhiteOak fund strategy

Being a balanced hybrid scheme, WhiteOak Capital Balanced Hybrid Fund aims to not only realise reasonable returns over time, but also reduce the intermittent volatility associated with pure equity allocation. This will be done by rebalancing allocation to 50:50 at periodic intervals, to provide a better balance vis-à-vis aggressive hybrid funds on a risk-adjusted basis. See chart below on how a 50:50 mix has historically delivered returns versus pure debt, equity, aggressive hybrid options vis a vis volatility.

The fund allocation includes investing 40-60 per cent in equity and equity-related instruments (including foreign securities), and 40-60 per cent in debt securities (including securitised debt) and money market instruments, cash, and cash equivalents, and /or units of domestic liquid mutual fund schemes across sectors.

Under normal circumstances, the asset allocation philosophy of the scheme will rebalance back to strategic asset allocation of 50 per cent, whenever the external asset allocation limits (i.e. 40 or 60 per cent) are breached due to market movements. However, the final portfolio can have higher or lower allocation, depending on the prevailing market scenario. Look at the chart below to see how back-tested data shows the efficacy of a 50:50 debt-equity mix.

The equity portion of WhiteOak Capital Balanced Hybrid Fund will be open to investing across large, mid and small-caps spread across sectors, and a blended portfolio with no style bias. For the debt portion, the scheme aims to maintain a majority of the exposure in sovereign, AAA equivalent, and selectively in AA equivalent securities, maintain medium interest rate sensitivity, and aim to achieve reasonable accrual income (yield).

The scheme will be benchmarked to the CRISIL Hybrid 50+50 Moderate Index.

Taxation

Given the 50 per cent debt allocation, gains from WhiteOak Capital Balanced Hybrid Fund will be taxed in the following manner. Short-term capital gains on holding period of less than 3 years will be taxed at your slab rate. For a holding period of 3 years and above, long-term capital gains will be taxed at 20 per cent (+surcharge + cess), with indexation benefit.

The fund will be managed by Ramesh Mantri (equity), Trupti Agrawal (assistant fund manager), Piyush Baranwal (debt), and Shariq Merchant (overseas investments).

Our take

Reasonable allocations to equity and debt have an important role to play in a portfolio. WhiteOak Capital Balanced Hybrid Fund offers a simple yet effective way to participate in both the asset classes. It is ideal for investors who want lower volatility, which is usually associated with pure/ higher equity allocation. While the taxation is not like equity funds, taxation should never be the primary consideration for investments.  Given that the balanced hybrid category has only two new schemes, it will be a leap of faith in certain ways. A small SIP to start out with could be a good way to test the waters, and if the fund performs in line with the mandate, bump up the SIP in future.

However, if you want to stick to aggressive hybrid funds, you can consider these 3 options: ICICI Pru Equity & Debt Fund, HDFC Hybrid Equity Fund and SBI Hybrid Equity Fund. On the conservative hybrid fund side, you have Kotak Debt Hybrid and SBI Conservative Hybrid Funds.

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