PPFAS Mutual Fund launches Parag Parikh Conservative Hybrid Fund

Parag Parikh Mutual Fund has launched Parag Parikh Conservative Hybrid Fund (PPCHF). The fund will predominantly invest in debt securities with a small allocation to equity and real estate. The new fund offer (NFO) opened up for a subscription on May 07, 2021 and will close on May 21, 2021. Here are a few things that you need to know about the fund.

How is the asset allocation going to be managed? For instance, even within the 10-25 per cent range available for equity allocation, is it expected to remain closer to 25 per cent in a steady-state or do we expect it to be managed more dynamically?

The intended asset allocation for Parag Parikh Conservative Hybrid Fund (PPCHF) will be:

A minimum of 75 per cent in debt securities, with the remaining 25 per cent invested in a mix of equity shares and Real Estate Investment Trusts / Infrastructure Investment Trusts (REITs / InvITs). However, the latter will not exceed 10 per cent.

Although the scheme will be managed dynamically, most of the time the above-mentioned allocation will be maintained.

How will the debt allocation be managed in terms of credit quality and duration?

As a fund house, we think conservatively and hence, usually aim at veering away from credit risk. In the case of Parag Parikh Liquid Fund (PPLF) too, you may have noticed that we predominantly invest in sovereign-rated securities. This is accompanied by a small allocation towards the highly rated and good quality corporate paper.

We intend to replicate this strategy in Parag Parikh Conservative Hybrid Fund.

The only difference will be that given a different mandate, the maturity of the instruments will be much higher as compared to PPLF. Hence, we may choose to take on some interest-rate risk or duration risk, with the aim of striving for returns that exceed inflation as well as those offered by competing instruments such as bank deposits.

On the equity side, do we expect the portfolio to be on similar lines as the AMC's pure equity funds with a compact, high-conviction and large-cap-tilted portfolio?

It will be a compact and high-conviction portfolio but not necessarily with a large-cap tilt. The focus here will be on companies with good and stable cash flows and who return those cash flows either through buybacks or dividends. Alternatively, they could be companies that are trading at a good margin of safety. We could also opt to invest in special situations like open offers, buybacks, etc., where we can earn a reasonable return within a defined time frame.

Conservative hybrid hasn't been a popular category in recent years. Barring the last two-three months, it has witnessed sustained outflows and a steady fall in AUM. Against this backdrop, what's your rationale to launch such a fund?

When we considered launching PPCHF, the idea was that its investment universe should not be restricted to a limited set of options. We, therefore, placed a premium on flexibility in terms of where we could allocate the corpus. For instance, this flexibility could be in terms of residual maturity (long duration or short duration), type of issuer (sovereign or AAA rated), etc.

This, supplemented with the freedom to invest in REITs and InvITs (which not only provide the potential for both, inflation protection - via rent escalation clauses - and capital appreciation via changes in the net asset value) was an attractive proposition to us. This asset mix - debt, equity and REITs/InvITs - was possible only in the 'conservative hybrid category'.

We were not daunted by the relatively minuscule size of the category, as we found that it was one that offered us the kind of differentiated scheme contours which would not only be valuable to our investors but would also be one in which we, at PPFAS Mutual Fund, would readily invest ourselves.

Who should invest in this fund?

The following two categories of investors could consider investing in PPCHF:

A young or middle-aged investor who is seeking to allocate some part of the portfolio towards debt mutual funds, without losing herself in the maze of myriad categories and products on offer. In other words, PPCHF could serve as an 'asset-allocation' tool.

A retiree or senior citizen who is seeking regular cash flows from her investments. Such investors could invest in PPCHF and then, after a minimum recommended holding period of three years, withdraw some amount of money every month in a relatively more tax-efficient manner via the systematic withdrawal plan (SWP) route in order to meet their regular cash flow needs.