Mutual Funds

Best conservative hybrid schemes to invest in 2019

Here’s the monthly update on our recommended conservative hybrid schemes. The good news is that there is no change in our recommendation list. Many investors want to invest in stocks, but they do not go ahead because they don’t have the required risk appetite to invest in a pure equity mutual fund scheme. Mutual fund advisors ask such investors to take a small exposure to equity through conservative hybrid schemes.

These schemes invest 75-90 per cent of the corpus in debt instruments and 10-25 per cent of the corpus in equity or stocks. The small equity exposure would help these schemes to deliver marginally higher returns than pure debt schemes. However, the exposure to equity also makes them riskier.

Sebi’s categorisation and rationalisation of mutual funds has created clearly defined seven hybrid scheme categories: aggressive hybrid, conservative hybrid, balanced hybrid, dynamic asset allocation or balanced advantage, multi asset allocation, arbitrage and equity saving schemes.

The conservative hybrid schemes are almost like erstwhile monthly income plans or MIPs that used to invest a small part of the corpus in stocks. The trouble with these schemes was that individual schemes used to decide the equity exposure themselves. However, after the re-categorisation exercise, the investment norms are clearly defined.

If you want to know more about hybrid schemes, you may read the story: All you need to know about new hybrid mutual fund categories

If you are a conservative investor looking to enhance your returns by taking a small exposure to equity, you must consider investing in conservative hybrid schemes. Here are our recommended conservative hybrid schemes:

Best conservative hybrid funds to invest in 2019

ICICI Prudential Regular Savings Fund
UTI Regular Savings Fund
Aditya Birla Sun Life Regular Savings Fund
Reliance Hybrid Bond Fund

If you are interested in the methodology employed to shortlist these schemes, you may read: Mutual Funds has employed the following parameters for shortlisting the Hybrid mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii) When H <0.5, the series is said to be mean reverting.
iii) When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance
i) Equity portion: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}
ii) Debt portion: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
5. Asset size: For Hybrid funds, the threshold asset size is Rs 50 crore

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