Equity markets are at a record high; the S&P BSE Sensex recently crossed the milestone level of 60,000. Due to the sharp rally in the equity market, the valuations across market caps have turned expensive. At this point, it is advisable to invest in pure equity mutual funds only if you have a long term investment horizon of more than 5 years.

For shorter time frames, you can consider Aggressive Hybrid Funds that invest in a mix of equity and debt securities. The equity assets in Aggressive Hybrid Funds range between 65%-80% of its total assets, while debt instruments have an exposure of 20%-35% in the portfolio.

This strategy can help investors benefit from the growth potential of equities. And if the market corrects, the debt component can act as a cushion against market volatility.

DSP Equity & Bond Fund is an actively managed Aggressive Hybrid Fund that has generated above average returns over longer time periods, delivering decent risk-adjusted returns for its investors.

Graph 1: Growth of Rs 10,000 if invested in DSP Equity & Bond Fund 5 years ago

Data as on September 28, 2021
(Source: ACE MF) 

Launched in May 1999, DSP Equity & Bond Fund has a track record of over two decades to its credit. The fund maintains an average allocation of around 75% in equities with the remaining in debt instruments and cash. DSP Equity & Bond Fund actively manages its equity portfolio to benefit from the available opportunities, while focusing on quality and growth. It invests across market caps, with a predominant allocation to large caps. DSP Equity & Bond Fund balances the risk by investing primarily in high quality debt instruments. The fund has done reasonably well across market phases and cycles and has a decent track record of generating remarkable long term outperformance over the benchmark and its peers. DSP Equity & Bond Fund has outperformed many of its peers during the market crash of 2020; its performance in the ongoing bull phase is satisfactory. Over the last 5 years, DSP Equity & Bond Fund’s NAV grew at a CAGR of 14.6%, which is nearly in line with the 14% CAGR delivered by its benchmark CRISIL Hybrid 35+65 Aggressive Index.

Table: DSP Equity & Bond Fund’s performance vis-á-vis category peers

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Absolute Fund	85	68.17	40.83	28.52	19.30	16.45	19.79	0.31
DSP Equity & Bond Fund	7,516	49.76	23.33	20.76	14.55	15.23	17.37	0.22
Kotak Equity Hybrid Fund	1,986	52.47	25.64	20.50	14.57	—	19.08	0.21
Canara Rob Equity Hybrid Fund	6,493	44.40	25.23	19.91	15.76	15.15	14.88	0.26
ICICI Pru Equity & Debt Fund	17,880	67.86	27.43	19.15	15.76	15.39	19.52	0.18
Mirae Asset Hybrid Equity Fund	5,949	46.82	23.79	19.07	16.48	—	16.80	0.22
SBI Equity Hybrid Fund	45,748	47.43	21.35	18.61	14.82	14.73	16.15	0.21
HDFC Hybrid Equity Fund	18,760	52.30	21.81	17.09	13.91	14.08	18.09	0.18
Franklin India Equity Hybrid Fund	1,459	52.53	22.49	16.98	13.17	13.90	17.12	0.18
Aditya Birla SL Equity Hybrid '95 Fund	8,154	51.88	21.05	15.30	11.89	13.07	17.83	0.15
CRISIL Hybrid 35+65 – Aggressive Index		40.25	21.73	17.12	14.00	12.99	14.92	0.22

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on September 28, 2021
(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.

DSP Equity & Bond Fund has managed to maintain a decent lead over the benchmark and the category average across time periods. With an absolute return of around 49.8% over the last one year, DSP Equity & Bond Fund has managed to generate an alpha of over 9 percentage points over its benchmark CRISIL Hybrid 35+65 Aggressive Index. This has helped boost DSP Equity & Bond Fund’s returns over the longer 2-year, 3-year, and 5-year period. On a 7-year return basis, the fund stands among the top quartile performers in the Aggressive Hybrid Funds category.

DSP Equity & Bond Fund has registered volatility higher than the benchmark, though nearly in line with the category average. With above average performance, DSP Equity & Bond Fund scores better than the benchmark and many of its peers in terms of risk-adjusted returns as denoted by its Sharpe ratio of 0.22.

Investment strategy of DSP Equity & Bond Fund

Classified under Aggressive Hybrid Funds category, DSP Equity & Bond Fund has a mandate to invest 65% -80% of its assets in equities along with 20% -35% in debt instruments. The fund usually allocates 75% of its assets in equities with the balance 25% in debt instruments and cash.

DSP Equity & Bond Fund’s equity portfolio is diversified across a range of market caps and sectors. The fund adopts a top-down approach to pick stocks. The fund managers conduct in-house research to identify value and growth stocks. While picking stocks, the fund managers focus on the historical and current financial condition of the company, capital structure, business prospects, strength of management, responsiveness to business conditions, product profile, brand equity, market share, competitive edge, research and technological know-how, and transparency in corporate governance.

For the debt portion, DSP Equity & Bond Fund invests only in those securities that are rated investment grade. Fund managers emphasise on credit analysis to determine the level of credit risk. The credit analysis focuses on the issuer’s historical and current financial condition, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing, future business prospects, as well as current and anticipated operating results, among other things. It also analyses various economic trends to determine the likely future course of interest rates.

Graph 2: Top portfolio holdings in DSP Equity & Bond Fund

• 

Holding in (%) as on August 31, 2021
(Source: ACE MF) 

DSP Equity & Bond Fund usually holds well-diversified portfolio of 50-60 stocks. As on August 31, 2021, DSP Equity & Bond Fund held 57 stocks in its portfolio. Top large cap names such as, ICICI Bank, HDFC Bank, Ultratech Cement, Infosys, and Bajaj Finance currently figure among the other top holdings in the fund’s portfolio. Some of these names have been part of its portfolio for over two years now. The top 10 stocks together account for 31.7% of its assets. Notably, 5 out of the top 10 stocks belong to Banking and Finance sector.

DSP Equity & Bond Fund benefitted immensely from names such as, ICICI Bank, Bajaj Finance, Ultratech Cement, Bajaj Finserv, HDFC Bank, TCS, Gujarat Gas, and Avenue Supermarts that contributed about 20% to its gains in the last 1 year.

Around 29% of the DSP Equity & Bond Fund’s portfolio is allocated to stocks in the Banking and Financial sector. Rest of the sectors in its holdings have allocation well below the 10% mark. This includes Infotech (5.8%), Pharma (4.8%), Consumption (4.7%), Cement (4.4%), and Engineering (4.2%). Some other core sectors in its holdings are Consumer Durables, Auto Ancillaries, Retail, Oil & Gas, Construction, Chemicals, Fertilisers, and Metals. Though DSP Equity & Bond Fund’s portfolio is skewed towards cyclical sectors, it has reasonable exposure across defensive and sensitive sectors.

DSP Equity & Bond Fund’s debt portfolio is diversified across 35 instruments consisting of Sovereign rated G-secs (17.1% of its assets) and moderate to high-rated Corporate Debt instruments (6.5% of its assets). The average maturity of the debt portfolio is typically around 3 -5 years, which makes it moderately sensitive to interest rate changes.

Suitability

DSP Equity & Bond Fund has managed to contain the downside risk during depressed market conditions, whereas its performance during upside market phases is noteworthy. This shows the fund’s ability to more than compensate its investors with decent risk-adjusted returns over complete market cycles.

While selecting stocks, the fund managers lay high emphasis on quality and growth potential and hold these stocks with a long term view. They also take few tactical calls to capitalise on short term opportunities. Its debt portfolio is dominated by high quality papers that are highly liquid and carry low credit risk. With this, DSP Equity & Bond Fund seems well placed in terms of investment strategy.

This makes DSP Equity & Bond Fund suitable for investors looking for a well-managed and relatively stable aggressive hybrid fund for long term capital appreciation with a long term investment horizon of at least 3 – 5 years.

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