Many mutual fund advisors believe that 2024 is going to be the year of hybrid funds. Because of the uncertainties regarding the global economy and ever rising Indian stock market, advisors have been advising investors to move cautiously. In such a scenario they believe that investing in hybrid mutual funds – schemes that invest in equity and debt – may serve investors, especially new and inexperienced investors, better.
Conservative hybrid mutual funds are the entry to the world of hybrid funds. These schemes invest mostly in debt and a small percent in equity. As per the Sebi norms, conservative hybrid schemes must invest 75-90% in debt instruments and 10-25% in stocks. These schemes are ideal for investors looking to invest a small part of their corpus in equity to earn some extra returns.
Conservative hybrid schemes, as the name suggests, are meant for investors with a conservative risk profile.
These schemes are similar to erstwhile monthly income plans or MIPs. MIPs were extremely popular at one point. They used to invest a small part of their portfolio in stocks. But their USP, as the name suggests, was regular income in the form of dividends. However, regular dividends stopped when the market got into a bad phase. That was the end of MIPs. The lesson: do not bank on hybrid funds to secure a regular income.
If you are looking for regular income, it is always better to opt for a systematic withdrawal plan or SWP. However, be careful about how much you withdraw if you don’t want to touch your capital. Always withdraw less than what you make if you want to preserve your capital.
Small, but not tiny equity exposure
If you want a ready-made scheme that would help you to take a small exposure to equity, here are our recommended conservative hybrid schemes. However, you should always remember, especially if you are investing in stocks for the first time, that stocks are risky. Stocks do not offer predictable or assured returns year after year. They can also lose money during a downturn. In short, it is the risk you are taking when you are investing in stocks, even if it is a maximum 25% of your investment.
Canara Robeco Conservative Hybrid Fund, one of our recommended schemes, has been in the third quartile for the last five months. Note, the scheme has been part of our recommended funds in the last year, too. You don’t have to worry about short-term underperformance. We closely watch the performance of these schemes and update you about it every month. Please follow monthly updates if you are investing in these schemes.
- ICICI Prudential Regular Savings Fund
- Canara Robeco Conservative Hybrid Fund
- Kotak Debt Hybrid Fund
- SBI Conservative Hybrid Fund
Here’s our methodology:
ETMutualFunds has employed the following parameters for shortlisting the Hybrid mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of returns is said to be a geometric Brownian time series. These types of time series are difficult to forecast.
ii) When H <0.5, the series is said to mean reverting.
iii) When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance
i) Equity portion: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}
ii) Debt portion: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
5. Asset size: For Hybrid funds, the threshold asset size is Rs 50 crore.
(Disclaimer: past performance is no guarantee for future performance.)
