Know Your Debt Fund: How to analyse the debt component of a hybrid fund?

The Securities and Exchange Board of India (Sebi) reclassified the mutual fund categories in 2018 carving  out 6 sub categories (all open-ended) within the 'hybrid fund' bucket. The 6 sub-categories are largely: Conservative Hybrid (75-90 percent in debt), Balanced Hybrid (40-60 percent in debt), Aggressive Hybrid (20-35 percent in debt), Dynamic Asset Allocation (allocation is dynamic), Multi-Asset Allocation (minimum 10 percent allocation each into at least 3 asset classes), Arbitrage Fund (minimum 65 percent in equity with arbitrage strategy) and Equity Savings (minimum 65 percent equity and minimum 10 percent debt).

However, it must be noted that Balanced Hybrid and Aggressive Hybrid fall within the same sub-category and the Sebi mandates that an AMC can choose to adopt either/or but not both.

While the regulator has mandated the allocation to equity and debt in this category, there is no strict sub-classification on credit quality or duration of portfolio. This means that as long as the overall investment in debt or equity does not exceed the mandated limit, it is perfectly within the rules to invest according to the fund manager's choice.

While most top AMCs keep the debt allocation to AAA/sovereign/AA, there are some who have taken riskier bets with allocation to A-rated paper too. Within the equity component, the larger orientation is seen to large and midcap stocks.

Within the hybrid space, the maximum flows and AUM are seen in Aggressive Hybrid and Dynamic Asset Allocation plans.

Kalpesh Ashar of Full Circle Financial Planners says that the category was missold as the regular dividend payout schemes but flows have been negative since DDT was introduced. He adds that when selecting a hybrid scheme, an AMC with a conservative approach is better than chasing 'alpha'.