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Despite the presence of good quality debt, the 25 per cent allocation to equities can create some volatility.
When the stock market is on a relentless bull run, many investors seek safety, especially conservative investors with low risk appetite. One of the avenues for such investors is conservative hybrid schemes.
These are open-ended schemes that invest between 10-25 per cent of the assets into equities and rest in bonds. The asset allocation ensures that the investor gets small exposure to stocks in a predominantly bond portfolio, making them relatively less volatile. “The higher debt allocation provides stability with lower volatility, while the equity exposure varies between 10- 25 per cent, which can enhance the overall return,” says Ravi Kumar TV, founder, Gaining Ground Investment.
Over three and five years ended July 10, 2024 these schemes on an average have given 9 per cent and 8.8 per cent returns, respectively, according to Value Research.
These schemes typically invest in high quality bonds and government securities, while some invest in long-duration bonds, taking interest rate risk. In most cases, these schemes’ equity portfolios are tilted in favour of largecap stocks. Though most have allocated around 20-25 per cent to stocks, there are some which have opted to cut down the exposure to 10-12 per cent. Accordingly, the returns have varied.
Stable returns
These schemes can work for someone looking for returns above that offered by fixed deposits over medium term. “Investors seeking a little more returns than pure debt funds while taking a little more risk can consider these funds,” says Abhishek Bisen, head, fixed income, Kotak Mahindra AMC.
“These funds offer a diversification alternative to investors wanting to increase the return potential of their savings (assuming they have a predominantly fixed-income portfolio,” says Prashant Pimple, chief investment officer, fixed income, Baroda BNP Paribas MF.
Good in falling interest rate
Since these funds have high exposure to debt, a falling interest rate scenario that is building up can help in higher returns. “These funds benefit from falling interest rates because bond prices tend to rise, leading to capital gains. If we expect rates to fall over the next year, one can consider investing,” says Kumar.
However, while investing in these schemes, the focus should be on maintaining relatively less volatility.
The downside
While the strategy of building a less risky debt-oriented portfolio is a good idea, this may not be an attractive investment option in a raging bull market for those seeking high returns. “The conservative nature limits the allocation to equity, potentially capping the upside during bullish market phases,” says Bisen.
Also, despite the presence of good quality debt, the 25 per cent allocation to equities can create some volatility, especially during flash crashes in stocks. “Though the funds would, by design, have a lower return potential than equity funds, they would be subjected to higher volatility than fixed-income funds due to the equity exposure,” Pimple says.
“The 25 per cent equity allocation can add volatility in turbulent markets,” Bisen says.
For lower tax slab
Since the gains in the units of these schemes are taxed at the slab level of the investor, these may not be attractive for investors in the higher Income Tax slab. “For individuals in lower tax brackets, conservative hybrid funds can be a compelling investment choice. They can be a more tax-efficient alternative to fixed deposits and provide greater flexibility in managing investments,” says Kumar.
Hold for the medium term
Though lump-sum can be invested, one should at least give three years for money to compound. “The ideal holding period should be at least 3 years, given the equity exposure,” Pimple says.ecurities, he added.
First Published: Jul 12 2024 | 2:00 PM IST
