Markets have been in corrective mode over the past month or so as a result of several global events such as US Treasury yields rising to record levels, tensions between Israel and Hamas in West Asia and a wave of selling by foreign investors.
From an asset allocation perspective, high yields on municipal bonds and volatile stocks may be a good time to consider hybrid funds. Conservative hybrid funds will be suitable for low-risk investors looking to play it safe in the markets, while being able to get reasonable returns that beat inflation. These funds can be useful additions to important financial goals that are 3-5 years away and cannot be risked with a permanent loss of capital.
Market regulator SEBI mandates conservative hybrid funds to invest 10-25 per cent of their portfolio in stocks and equity-related instruments, while 75-90 per cent must be parked in debt securities.
Conservative investors can consider HDFC Hybrid Debt Fund as it has consistently been above average in this category. Investors may look to either add small lump sums over a period of time or begin a systematic investment plan in the fund.
Above average performance
HDFC Hybrid Debt has been around for almost 20 years – earlier than the previously long-term HDFC MIP. The fund was generally able to achieve double-digit returns over periods ranging from 3 to 5 years.
When we take three-year rolling returns over the 10-year period from November 2013 to November 2023, the fund has averaged 9.6 per cent. This yield puts it above peers like Axis Regular Saver and Franklin India Debt Hybrid.
In no rolling three-year period over the past 10 years, the fund has not provided negative returns.
HDFC Hybrid Debt has achieved more than 10 per cent over three-year rolling terms, nearly half the time in the last 10 years.
When we take into account compounded point-to-point annual returns, the chart has given a solid 10.3% over the past 10 years. It has generally been in the double digits across time frames. The fund outperformed the category average by 1-2 percentage points.
Even SIP returns (XIRR) are a very good 10.3 per cent over the last five-year period, according to data from Valueresearch.
All gains from conservative hybrid funds are fully taxable without indexation to the slab applicable to you. However, at return levels of 9 to 10 per cent, select schemes from this category remain attractive.
The fund typically allocates between 22 to 25 percent of its portfolio to stocks across market cycles.
HDFC Hybrid Debt invests almost its entire equity stake in large-cap stocks. Most of the selections come from the Nifty 50 and Nifty 100 indices. Allocations to individual stocks are low, usually around 1 per cent. The equity portion is therefore reasonably moderate in terms of risk and focused on providing a boost to the debt portfolio.
The debt portion consists of non-convertible bonds, sovereign securities and government securities. Government securities represent between 15 and 20 percent of the total portfolio. Currently (September 2023) it is just under 20 percent. Bonds and NCDs represent the major holdings in the debt segment and typically account for 50 percent or more of total holdings.
These noncommunicable diseases come from public sector institutions and private companies. Most are rated AAA, although the fund also invests a small portion in AA-rated securities as well.
Power Finance Corporation, IRFC, HDFC Bank, Bajaj Finance, Sikka Port & Terminal, Tata Motors and SIDBI are among the major bond holdings.
While investing in AA rated securities, HDFC Hybrid Debt ensures exposure to popular names or conglomerates. Therefore, credit risk is very low in a debt portfolio.
The Fund actively manages its debt maturity profile. The maturity profile has increased from 4-5 years to beyond 6 years over the past year. The adjusted duration, which measures the change in bond prices due to a change in interest rates, of 3.67 years is considered relatively reasonable with respect to the portfolio’s sensitivity to interest rate changes. The Macaulay duration is acceptable at 3.9 years. The fund has been holding cash and net current assets at 5 percent or higher in recent years. Cash equivalents were 6.1 per cent in its portfolio for September. The yield to maturity is a healthy 7.64 percent.
Overall, the portfolio is a healthy mix of low-risk debt and stocks with the potential for above-average returns.
Better returns than category peers
Reduced credit risk of the debt portfolio
Part of shares mostly in large companies