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Saturday, 21 June 2014

Hybrid Funds

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Hybrid Mutual Funds



Mutual fund houses such as DWS, HDFC, ICICI Prudential and Tata have launched close-ended schemes that invest in a mix of debt and equity. Though some schemes avoid calling themselves a capital protection fund, they invest in debt and equity in such a manner that by the time the scheme matures, the debt component grows to ensure that the investors get their capital back and equity brings in the additional returns.

Risk-averse investors can look at these schemes, as there is little possibility of a loss of capital over three years. The scheme offers investors an opportunity to take a small exposure to equity , while sticking to the conservative asset allocation.

These hybrid funds generally mature in three or five years. The debt component comprises good quality bonds that mature just before the maturity of the scheme. In case of a three-year scheme, approximately 80% of the money is invested in bonds, which ensure return of capital invested at the end of the tenure. The balance is invested in equity . These schemes aim at offering double-digit returns. The one-year returns of similar schemes look good, given the recent rally in the equity markets. Three-year schemes launched in 2011, which will be maturing in 2014, are performing well. For example, ICICI Prudential Capital Protection Oriented Fund -Series III, launched in July 2011, has delivered 9.64% since its inception. Axis Capital Protection Oriented Fund -Series 1 launched in November 2011, has so far delivered 15.33% returns, says Value Research, a mutual fund tracking entity .

Experts feel that the current situation is ripe for these schemes.
A three-year horizon allows the fund to benefit from relatively high accrual yields for debt instrument in that segment. Also, it would allow the fund to benefit from equity component, while neutralising the near to medium-term volatility.

The close-ended structure helps investors to ride out the intermittent volatility and the fund manager too is not subject to redemption pressure in these schemes, say experts.

Currently, with the stock markets on the rise, this can be a good vehicle to park their money in for risk-averse investors.


In the three months ended on June 13, CNX Nifty has gained 16.16%. Conservative investors are worried about which way equity markets will go from the current high level and still they want to participate in equity and earn returns in excess of debt. Such schemes are launched to cater to the needs of these investors

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