Aggressive hybrid funds could prove to be a worthy long term bet because investors benefit from the stability of debt investment as well as high growth potential of equities. If your investment objective is focused on gains from investment across the universe of stocks, albeit at a lower risk, you can consider investing in an aggressive hybrid fund that invests predominantly in equities along with meaningful exposure in debt instruments (to reduce volatility).

The fund managers of aggressive hybrid funds regularly rebalance the portfolio to maintain the mandated equity and debt allocation, which is why it is less risky than a pure equity fund.

Investing in aggressive hybrid funds also gives you the benefit of investment across market capitalization, as these funds usually follow a multi-cap approach.

Mirae Asset Hybrid equity Fund (MAHEF) is one such aggressive hybrid fund that invests in a diversified portfolio of strong growth stocks and balances the risk with allocation to investment grade debt securities.

Graph 1: Growth of Rs 10,000 if invested in Mirae Asset Hybrid Equity Fund 5 years ago

Data as on August 05, 2020
(Source: ACE MF) 

MAHEF is one of the youngest funds in the aggressive hybrid funds category and has recently crossed the 5-year milestone. Despite being a new entrant in the category, MAHEF has been quick to strengthen its base with a superior track record and stands strong, much ahead of its prominent peers. It is positioned as a lower risk alternative to pure equity schemes, while retaining the upside potential from equities. MAHEF aims for favourable risk-reward through a predefined asset allocation. While it captures growth opportunities through equity, its allocation to debt helps achieve stability. An investment of Rs 10,000 in MAHEF five years ago would have grown to Rs 16,228 (at 10.2% CAGR). A similar investment in the benchmark would have been valued at Rs 14,757 (a growth of 8.1% CAGR).

Table: Mirae Asset Hybrid Equity Fund’s performance vis-à-vis category peers

Scheme Name	Corpus (Cr.)	1 Year (%)	2 Year (%)	3 Year (%)	5 Year (%)	7 Year (%)	Std Dev	Sharpe
BNP Paribas Equity Hybrid Fund	397	12.21	8.29	8.45	NA	NA	14.56	0.070
Quant Absolute Fund	2	17.04	8.42	7.50	8.99	16.13	17.75	0.026
Canara Rob Equity Hybrid Fund	3,041	12.75	6.22	7.47	8.76	15.44	14.07	0.051
Mirae Asset Hybrid Equity Fund	3,468	7.29	4.90	6.45	10.16	NA	16.15	0.043
SBI Equity Hybrid Fund	30,192	5.54	3.84	6.09	7.95	15.12	15.32	0.027
Sundaram Equity Hybrid Fund	1,561	4.93	2.27	5.76	7.75	10.96	15.84	0.022
DSP Equity & Bond Fund	5,661	9.01	3.73	5.12	7.76	14.76	16.74	0.014
Shriram Hybrid Equity Fund	53	7.11	2.45	4.20	5.44	NA	14.21	-0.012
LIC MF Equity Hybrid Fund	376	2.48	3.69	3.92	4.29	8.71	16.06	-0.001
Edelweiss Aggressive Hybrid Fund	13	4.84	1.51	3.69	5.05	11.92	15.70	-0.006
CRISIL Hybrid 35+65 – Aggressive Index		7.86	4.51	5.91	8.20	12.03	13.99	0.022

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on August 05, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

MAHEF has registered an impressive performance with a decent track record since its inception. The fund figures among the top category performers across time periods and has outperformed the benchmark – CRISIL Hybrid 35+65 – Aggressive Index by a decent margin of 2 percentage points on a 5 year returns basis.

MAHEF gives high emphasis to risk management. Although it’s Standard Deviation of 16.15 (indicating its volatility) is higher than the benchmark, it is lower than the category average and quite competitive to its peers. The fund has rewarded its investors with remarkable risk-adjusted returns. Its Sharpe ratio is among the best in the category and far superior than the benchmark.

Investment strategy of Mirae Asset Hybrid Equity Fund

Classified under aggressive hybrid funds, MAHEF is mandated to invest 65% to 80% of its assets in equities and 20% to 35% in debt instruments. The equity investments of the fund are typically in large sized companies that help provide more stability and less price volatility to the fund. On the debt side, it retains the flexibility to invest across securities in the debt and money markets, but the ones that are rated investment grade.

The fund holds a well-diversified portfolio without a bias towards any particular theme, sector, or style while picking stocks for the portfolio. Following a mix of top-down and bottom-up approach to investing, the fund managers broadly analyse the macro economy and invest in stocks of high-growth companies expected to benefit from macroeconomic, sectoral and industry trends.

Graph 2: Top portfolio holdings in Mirae Asset Hybrid Equity Fund

Holding in (%) as on June 30, 2020
(Source: ACE MF)

MAHEF usually holds around 70% to 75% of its assets in equities and remaining in debt and cash. As on June 30, 2020, the fund held around 69.9% allocation in equities, investing in as many as 59 stocks. The top 10 stock holdings together account for 36.4% of its assets.

Reliance Industries tops the list of stocks with an exposure of around 6.7%. HDFC Bank, ICICI Bank, Infosys, and Axis Bank are other stocks that feature among the top 5 holdings in the portfolio. Notably, most of its top holdings have remained the same over the last one year.

Reliance Industries contributed the most to the fund’s gains in the last 1 year along with stocks like Tata Consumer Products, Torrent Pharma, Balkrishna Industries, Divis Lab, etc. However, its bets on companies like Axis Bank, SBI, L&T, ICICI Bank, IndusInd Bank, HDFC Bank, etc. have not met its return expectations.

MAHEF’s portfolio is diversified across various sectors. Banks lead with an allocation of around 17.1% in the portfolio, whereas it also holds another 8.3% into Financials. Petroleum, Infotech, Consumption, and Pharma follow closely behind with an exposure of around 5% to 9%.

The debt allocation in MAHEF’s portfolio is diversified across 25 debt instruments majorly consisting of Sovereign rated G-secs with allocation of 13.7%. It also holds significant exposure in moderate to high rated corporate debt, commercial papers, and cash equivalents. The fund usually maintains a high quality debt portfolio, with an average maturity of around 6 years, which makes it moderately sensitive to interest rate changes.

Suitability

Belonging to a fund house driven by stringent systems and processes, MAHEF strictly sticks to its investment mandate and adopts a well-balanced approach to investing. The prudent investment strategies followed by the fund house along with a fairly diversified portfolio of equity and debt has enabled it to beat the category average, while keeping the risk at reasonable levels. Hybrid Equity Funds come with moderate risk-moderate return profile.

Hence, there is a possibility that the fund may go through bouts of underperformance during swift upside market rallies. This makes MAHEF suitable for investors with a moderately high risk appetite and long term investment horizon.

Note:   This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here