Mumbai: Dwindling returns from high-quality fixed income funds are making many conservative investors add equity to their portfolios through allocation to hybrid funds.
Financial planners believe investors with a risk appetite can allocate 20% of their portfolio to a mix of such equity savings, balanced advantage and aggressive hybrid schemes.
“Mutual fund schemes that hold only AAA rated paper will give investors not more than a 5% return post expenses,” says Anup Maheshwari, founder, Money Mantra.
Over the last couple of years, returns from high quality debt funds have moved down from 7% to 5% with categories like liquid, ultra short term and arbitrage offering only 3-4% returns. For investors who want to earn 7% returns, adding hybrid funds which have an equity component is another option.
“Investors with no or very small equity exposure can allocate 20% to a mix of hybrid funds like equity savings, balanced advantage and balance funds. However, since there is an equity component they should come with at least a three to five year time frame, ” says S Shankar, founder, Credo Capital.
Equity Savings, HDFC Balanced Advantage, Kotak Equity Hybrid and Mirae Hybrid Equity Fund.
Hybrid funds invest in a mix of equity and debt instruments. Schemes that follow hybrid strategy periodically rebalance portfolios in line with market outlook for each asset class. Typically such schemes are less volatile than pure equity funds and also help investors get better tax efficient returns.
Equity savings funds typically invest 10-25% of their portfolios in equity with the balance in debt and arbitrage given investors the benefit of equity taxation. This category has given returns of 7.78% and 8.09% over three and five years.
Balanced advantage funds which have a higher component of equity and invest 30-80% of their portfolios in equity based on market valuations have returned 8.78% and 9.03% in the same period, while aggressive hybrid funds invest up to 65% of their portfolio in equity has returned 11.64% and 12.28% respectively. Most hybrid categories are conservatively managed and typically make their equity allocation to large cap companies with a very small allocation to the mid and small cap space.