Why this hybrid fund is a good investment amid volatile markets

After a relentless rally over the past few months, markets have turned volatile in recent weeks. The broader markets, especially, have raised concerns relating to elevated valuations. Market regulator SEBI pushing mutual funds to declare the stress test results on their holdings is also keeping investors on tenterhooks. With elections set to be conducted in a phased manner from April till the first week of June, the markets may remain volatile for the foreseeable future.

In this regard, hybrid funds may be suitable for investors, especially as this category lends itself to lump-sum investing as investment timing becomes less relevant due to the fund manager’s shuffling of the portfolio based on specific market conditions. Equity savings funds are hybrid schemes that invest in a blend of equity and related instruments, debt and derivatives. As equity investments – that are usually hedged in this case – need to account for at least 65 per cent of the portfolio, these funds enjoy equity taxation.

Mahindra Manulife Equity Savings Fund is a quality performer in the category and has delivered returns consistently since inception in February 2017. With above-average, double-digit returns over the years, the fund can be a good diversifier for a conservative investor’s portfolio, especially in the current environment. Investors can consider parking lump-sums in the fund with a three-five year perspective. Those without lump-sums to spare can consider SIPs.

Delivering reliably

The fund has been consistent in being among the best in its category. On a point-to-point basis, Mahindra Manulife Equity Savings has delivered more than 12 per cent over the medium to long-term. In the last one year, it has given returns in excess of 20 per cent.

When three-year rolling returns are taken from February 2017 to March 2024, the fund has delivered a mean of 11.5 per cent, higher than most peers.

If three-year rolling returns are taken over the above-mentioned period, the fund has given more than 10 per cent returns nearly 74 per cent of the time. With the same timeframe and rolling period criteria, Mahindra Manulife Equity Savings has delivered more than 12 per cent over 60 per cent of the time.

When SIP returns (XIRR) are considered for the past seven years, the scheme has given 12.3 per cent.

Clearly, the fund has been quite consistent over the past seven-odd years.

Deft portfolio moves

Mahindra Manulife Equity Savings invests in a blend of equities, bonds and derivatives.

The equity portion of the portfolio is generally kept at 65 per cent or a bit more. For most part, the stocks are large-caps from the Nifty 100 basket. These large-caps account for over 80 per cent of the equity holdings across most market conditions, with mid- and small-caps making up the remaining part. Financial services dominate equity holdings across cycles. The other holdings are shuffled around a bit based on market conditions. For example, the IT sector was among the top holdings in early 2022, but has been trimmed subsequently as the segment faces business headwinds. Construction materials stocks have seen stakes being hiked in the last couple of years as the economy went into healthy growth mode. Surprisingly, the fund has FMCG among its key holdings in its recent portfolio, even as weak rural volume growth has seen the sector underperform.

In the debt portion, corporate bonds form a key part and the holdings are restricted to AAA-rated securities, with a few AA-rated ones as well in the case of reputed conglomerates. Real estate investment trusts (REITs) also find a small space within the portfolio. Government bonds and treasury bills are other key fixed-income holdings for the fund. The scheme takes no credit risk in its debt portion.

Mahindra Manulife Equity Savings also takes derivative positions to the tune of 20-30 per cent of the assets. This helps keep a good part of the equity portion hedged and also opens the possibility of accruals to the portfolio via pay-offs.

For conservative investors, this fund can be a part of their satellite portfolio as a diversifier. A lump-sum investment with a time horizon of five years can be rewarding for investors. The equity taxation for such funds ensures that the risk-adjusted returns are healthy as any gains higher than ₹1 lakh made on a holding period of more than one year are taxed at 10 per cent.