Balancing Between Debt And Equity

The importance of allocation to various asset classes—equity, debt, gold etc.—comes to the fore in times of volatility. At present, the equity market is volatile, and the debt yields have been moving up. Allocation to various asset categories can be done through hybrid funds. According to the fund classification norms by the Securities and Exchange Board of India (Sebi), there are six types of hybrid funds. Let us focus on aggressive hybrid fund, previously known as balanced funds and see its advantages.

The quantum of money being managed by various hybrid funds gives us an idea of their popularity. As on May 31, 2022, the AUM in the six hybrid funds was Rs 4.83 lakh crore. Of this, balanced advantage funds, aggressive hybrid funds and arbitrage funds accounted for Rs 1.8 lakh crore, Rs 1.45 lakh crore, and Rs 1 lakh crore, respectively. The other three have relatively smaller AUMs. The sizable AUM of aggressive hybrid funds show its popularity.

Let’s understand the advantages of these funds and their performance.

Advantages Of Hybrid Funds

Allocation Discipline: Allocation to equity and debt is done in a ratio, in accordance with the investment objectives within the Sebi norms. The rule for aggressive hybrid fund is equity allocation in the range of 65-80 per cent. Let’s assume the decided ratio is 70:30 to equity:debt. Since market movement is not uniform, this ratio could get distorted to 85:15 in the event of a rally. Unless you tweak it, it will remain different from your initial objective.

Fund Manager’s Scope: The fund manager is bound by certain rules. In large-caps, this is limited to top-100 stocks by market capitalisation, while in small-caps, the exposure is towards companies beyond the top 250 stocks. In debt funds, there are rules on portfolio maturity, credit rating of instruments, etc. In hybrid funds, the fund manager has flexibility.

Tax Efficiency: Taxation is more efficient in equity funds, as it is considered long-term if held for one year against three years for debt funds. Moreover, long-term capital gains of up to Rs 1 lakh per year is exempt for equity funds. Say for an allocation 70:30 in equity and debt in pure-play funds, 70 per cent is taxed as equity and the rest as debt. In aggressive hybrid funds, the entire investment is taxed as equity, as 65 per cent or more is in equity.

Picking Your Fund

The choice of your fund should be based on the pedigree of the asset managment company (AMC), track record and performance. Over a 10-year horizon, ICICI Prudential Equity & Debt Fund has performed the best. Its annualised return over 10 years till July 5, 2022 is 15.8 per cent against the basket average of 12.8 per cent. In the last five years, it has outperformed the peer group with 12.5 per cent annualised return against the benchmark return of 8.5 per cent. In the last one year, it yielded 13.5 per cent against the basket average of 0.32 per cent. In the last two years of equity rally, it returned 30.5 per cent annualised return against 20.5 per cent for the basket of 16 funds. The amount of money managed in this fund is Rs 18,100 crore as of June 2022, which is the second highest in this category.

There is also SBI Equity Hybrid Fund, which has yielded 14.6 per cent and 10.5 per cent over the last 10 and five years, respectively. However, over the last one year, it gave only 1.3 per cent.

Conclusion

Over the last one year till July 5, 2022, the Nifty has given -0.02 per cent, while the basket of 16 aggressive hybrid funds have returned 0.32 per cent. As for your investment decision, when you choose parameter-defined funds, you have better control over the boundaries of investments to be followed by the fund manager. So, you can invest in large-cap or small-cap funds or choose the portfolio maturity of debt funds to suit your needs. In aggressive hybrid funds, the fund manager has more flexibility, and allocation discipline is followed. Hence, you can invest in it and forget it over a long horizon.

The writer is a Corporate Trainer and Author