For financial goals that are less than five years away or to help reasonably protect and grow existing capital, the conservative hybrid fund category can be considered by investors who have a moderate or low risk appetite. Even as a portfolio diversifier, the category can be a useful investment.
Market regulator SEBI has mandated that conservative hybrid funds must invest 10-25 per cent of their portfolio in equity and equity-related instruments, while 75-90 per cent must be parked in debt securities.
The recent tax changes – removal of both indexation benefit as well as the distinction of long and short terms – may have taken some sheen off debt funds and even conservative hybrid schemes.
Nonetheless, conservative hybrid funds can help beat inflation with a low-risk portfolio and serve as a suitable vehicle for saving towards medium-term goals.
In this regard, ICICI Prudential Regular Savings can be considered by conservative investors with a three- five-year time horizon. It has delivered above-average returns consistently and has been among the best in its category. Investment via lump-sums is suitable for conservative hybrid funds, though SIPs (systematic investment plans), too, would not be totally out of place for asset allocation as part of long-term goals.
Consistent performance
ICICI Prudential Regular Savings has been among the top few funds in its category. When three-year rolling returns over the 10-year period from June 2013 to 2023 are taken, the fund has delivered an average of nearly 10.8 per cent. This return places it above peers such as HDFC Hybrid Debt, Canara Robeco Conservative Hybrid, Axis Regular Saver and UTI Regular Savings.
A key aspect to note is that in any three-year rolling period over the last 10 years, the fund has not given negative returns. The minimum itself is an impressive 5.9 per cent over three-year rolling periods.
ICICI Prudential Regular Savings has delivered more than 10 per cent over three-year rolling periods over 62 per cent of the times in the last 10 years.
On five-year rolling returns over June 2013 to June 2023, again, the fund has delivered a robust 10.44 per cent on an average.
All gains from conservative hybrid funds are added to investors’ income and taxed at the applicable slab. But if returns are healthy at 10 per cent levels, as managed by this fund, the post-tax returns would still be healthy enough to beat inflation for even those in the 30-per cent slab.
Moderate blend of debt and equity
Given that equities can account for only a quarter of the portfolio in conservative hybrid funds, they serve the purpose of providing a kicker to otherwise debt-like returns.
ICICI Prudential Regular Savings keeps the proportion of equities to well below 25 per cent of the portfolio. In fact, net equity accounted for well below 20 per cent of the total pie over the past few years, but has been increased to nearly 23.5 per cent, as per its May 2023 fact-sheet.
The stocks are usually from the Nifty 50 basket and are therefore only bluechips for most part.
On the debt portion, there is a mix of certificates of deposits, government securities, corporate securities and commercial papers.
The fund invests significantly in AA-rated securities as well for better yields. But the exposure here is to fairly stable large corporates such as Tata Housing Development Company, Bharti Telecom, ONGC Petro Additions, Muthoot Finance, Manappuram Finance and the like. So, credit risks are quite low.
In keeping with the higher interest rate scenario, the fund also invests in floating rate bonds. It has almost 12.3 per cent exposure to 07.93 per cent GOI Floater 2034.
The average maturity of the debt portfolio in the last one year has been in excess of five years, suggesting that the fund prefers securities in the medium-term maturity. The modified duration in its latest portfolio is 1.66 years, which is reasonable in terms of interest rate sensitivity. The yield to maturity is a healthy 8.16 per cent, nearly a percentage point more than last year’s figures.
ICICI Prudential Regular Savings is thus a balanced portfolio with reasonable returns for investors with a modest risk appetite looking to preserve capital and beat inflation convincingly.