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Playing it Safe

Hybrid mutual funds for investors who want minimal exposure to equity

Hybrid funds are those that combine two asset classes, debt and equity. There are three types of funds that fall within it: debt oriented, equity oriented and monthly income plans (MIPs).

When talking about MIPs, it must be clarified that there is no return guaranteed. In the meltdown of 2008, three MIPs did not pay any dividend that year: DSPBR Savings Manager Moderate, DSPBR Savings Manager Aggressive and DWS MIP B.

A decade ago, that was not the case. In fact, the Securities and Exchange Board of India (SEBI) has been dissuading fund houses from using the term MIP. Most recent launches bear witness to it. Peerless Income Plus and Axis Income Saver did not employ the terms 'monthly' or 'income' when naming their schemes. Bharti AXA Mutual Fund renamed its MIP as Regular Returns Fund before obtaining final approval.

The performance of these schemes depends on how the equity market performs.

In the meltdown of 2008, the category shed 3.42 per cent. The worst performer (ING Optimix Income Growth MMFoF 30% Equity Option A) shed (-)15.50 per cent while the best (Birla Sun Life MIP II Savings 5) delivered 28.55 per cent. The latter benefited from aggressive maturity bets on the debt side with no equity exposure.

Many MIP fund managers brought down their equity exposure by February 2009. Just four funds (out of 51) had an exposure above 20 per cent while five brought down the equity exposure to almost nothing. Once the market began reviving in March 2009, equity exposure began to rise. By December 2009, 17 (out of 54) had increased equity exposure to over 20 per cent. Most funds were invested close to their upper limit of equity. This helped the category deliver 14.88 per cent, marginally higher than the returns delivered in 2007, but second highest since 2000.

On the debt side of the portfolio, the risk depends on the fund manager's call on interest rate. MIPs invest in all kinds of debt paper. Some of them take aggressive maturity bets while some stay conservative.

Recently, the average maturity of the debt portfolio of this category of funds came down to 1.09 years (March 2010) from 3.14 years (June 2009), but has now increased slightly to 1.67 years (May 2010).

However, the individual differences are stark. For instance, Tata MIP has the highest maturity (5.09 years) and ING MIP the lowest (<30 days). MIPs did impress in 2009. On their part, fund houses are aggressively pushing these schemes. Currently, 45 are available.

Over the past five years, the category has delivered an average annualised return of 9.32 per cent. The best performer (UTI Mahila Unit Scheme) delivered 18 per cent and the worst (Baroda Pioneer MIP) 3.73 per cent.

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