Hybrid mutual funds, which invest both in equity and debt markets, can help mitigate the volatility in one’sportfolio during market uncertainties such as the present one.
One of the categories within hybrid funds — conservative hybrid schemes — invests primarily in debt securities and money market instruments with moderate exposure to equities.
As per SEBI’s mandate, these schemes can invest 10-25 per cent of their total assets in equity and the rest in debt instruments.
The higher allocation to debt helps steady growth of principal with lower risk. The equity component, on the other hand, helps spice up returns.
These schemes are suitable for investors with a medium risk profile who want some equity exposure. Retirees or people nearing retirement who want to shift a part of their investment from high-risk assets to relatively low-risk funds can also consider these schemes.
Kotak Debt Hybrid is one of the top-performing funds under the conservative hybrid category. It has invested 20-25 per cent in equities and allocated the rest to debt and money market instruments.
It is worth noting that Kotak Debt Hybrid saw an upgrade in rating in our BusinessLine Portfolio Star Track MF Ratings from four to five stars in the quarterly review of January 2020. This is mainly due to the fund’s improved performance in recent times, in relation to its peers, on risk-return adjusted basis.
Performance
The fund has outperformed its category in various time-frames.
Performance, as measured by the three-year rolling return calculated from the past seven years’ NAV history, shows that the fund delivered a CAGR of 9.1 per cent, while the category clocked 8.2 per cent.
Given its higher allocation to mid- and small-cap stocks, the scheme’s performance in equity market rallies has been relatively notable. During the equity market downturn in 2015 and 2018, the fund contained the falls well but underperformed the category marginally.
However, its performance in the current fall (January-June 2020) has been noteworthy —it generated one per cent positive return while the category was down by 1.6 per cent.
Portfolio
It holds a blend of growth and value stocks. Its equity portfolio is managed with a multi-cap approach. Allocation to large-, mid- and small-cap stocks is 15 per cent, 4 per cent and 5 per cent of the overall portfolio respectively.
The fund emphasises on safety, liquidity and returns while choosing debt securities. Over the years, it has mainly invested in highest-rated bonds and government securities.
As of May 2020, it holds three relatively low-rated bonds — Uttar Pradesh Power (A+), Hindalco (AA) and Bahadur Chand Investments (AA) — with a combined exposure of 7.9 per cent.
The fund manager takes active duration calls. Over the past year, the average maturity of the debt portfolio was increased from 2.2 years to 6.8 years, to cash in on the bond rally.