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  • Thought Leadership Corner Reviewing the debt component of hybrid funds

    Reviewing the debt component of hybrid funds

    The debt component in hybrid funds offers stability to the investment portfolio. MFDs should review the debt component in hybrid funds to see if it matches clients’ risk profile.
    Team Cafemutual Sep 23, 2021

    As the name ‘hybrid’ suggests, these funds invest in a blend of more than one asset category. The proportion of investment in debt and equity depends on the fund type i.e. conservative hybrid fund, balanced hybrid fund, aggressive hybrid fund, dynamic asset allocation/balanced advantage, multi asset allocation, arbitrage fund and equity savings.   

    Hybrid funds aim to garner higher returns through equity portion while offer stability through debt component. Investors seeking to create a balanced portfolio must be mindful of the debt component in these funds. 

    Here is how the debt component can be reviewed before deciding which fund to buy.

    • Check for credit quality

    Credit risk is the risk of bond issuer defaulting in interest and/or principal repayment, which can be gauged from credit rating assigned. High-rated instruments normally carry lower risk. The risk increases as the ratings move downwards.  AAA is the highest rating for bonds having maturities of more than one year and A1+ is the highest rating for bonds with maturities lesser than 365 days. It is recommended to take into account the ratings across periods.   

    The proportion of fund’s investment in top-rated instruments can be a differentiating factor in comparing two or more funds.  

    • Shorter the better

    A rise in interest rate is generally accompanied by a fall in bond price and vice versa. Modified duration helps in knowing the impact of change in interest rate. Multiplying the percentage change in interest rate with modified duration gives the percentage change in price. For simplicity purpose, let us look at this example: With a 1% rise in interest rate when the duration is 3 years, the bond price will decline by 3%. On the contrary, a 1% drop in interest rate will be accompanied by a 3% rise in bond price. 

    The shorter the modified duration, the lower is the sensitivity to changes in interest rate.  

    • Keep a tap on external factors 

    Keeping a tap on external factors helps in understanding the anticipated interest rate movements and their resultant effect on bond prices. 

    • Opt for a more diversified portfolio

    Debt funds invest across corporate bonds, commercial paper, treasury bills and other instruments of varying maturities. Investor’s time horizon must match with average maturity, which is nothing but the weighted average maturity that takes into account maturities of all securities forming the debt fund. While most debt funds invest in top-rated instruments, these funds may also invest in other instruments for generating higher returns. 

    Here is where the proportion of investment in each asset type plays an important role in matching investors’ time horizons and risk appetite.  

    • Check for inter-scheme transfer 

    Under Inter Scheme Transfer (IST) a fund house can transfer securities from one scheme to another scheme. The transfer takes place at market price and is subject to certain conditions. In the case of open-ended schemes, fund houses could resort to IST for managing liquidity during times of more than expected redemption pressure. IST is also allowed for rebalancing during a breach of regulatory limit. 

    Details of IST, its rationale and nature of assets transferred should be checked before selecting a scheme.

    Disclaimer: An Investor Education Initiative by Mirae Asset Mutual Fund  

    For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge center section available on the website of Mirae Asset Mutual Fund 

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

     

     

     

    Have a query or a doubt?
    Need a clarification or more information on an issue?
    Cafemutual welcomes all mutual fund and insurance related questions. So write in to us at newsdesk@cafemutual.com

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    1 Comment
    vijay · 3 years ago `
    Hello friends,

    Im one of MFD working since last 3yrs, I already created one group for IPO information which is very helpful to all for information
    And now I have thought to create group for ONLY MFDS so we can share information and help each other which can help to grow us.

    Join only if you are MFD or in related business
    Below is the link :
    https://chat.whatsapp.com/EyHXt09C1bI5ZxShKSqa5A

    Group Goal :: Share information/experience and help each other in process. Please no spam, no advertisement
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