Franklin debt mutual fund fiasco has many debt MF investors worried and rightly so. It is their hard-earned money at stake. The worry is that the corporate bonds in the portfolios of their schemes may experience default. We discussed in the previous post how you can check if your debt mutual funds are safe. However, as an investor, your concern shouldn’t be limited to just debt mutual funds.
Why?
Because it is not just the debt mutual funds that invest in corporate bonds. All hybrid funds do that too. Therefore, if you have invested in a hybrid fund, you might want to look at fixed income portfolios of such schemes too.
Moreover, when we talk of hybrid funds, the discussion shouldn’t just be limited to balanced funds (or aggressive hybrid funds). There are 6 types of hybrid funds as per SEBI MF Categorization rules, 2017.
Depending on the fund category and the fund manager outlook, the fixed income exposure can range from 0% to 100%. Therefore, we are talking about a high fixed income exposure, something you can’t and shouldn’t ignore. Therefore, if you are worried about your debt mutual fund investments, you should be concerned about your hybrid mutual fund investments too. There are corporate bonds in the hybrid portfolios too. And defaults in fixed income portfolios of hybrid funds have happened in the past.
The Credit Risk in Hybrid MF Schemes
In this post, I will break down the fixed income portfolios of the some of popular hybrid funds across credit ratings. You must review fixed income portfolios of your schemes too.
- HDFC Hybrid Equity Fund
- ICICI Prudential Equity & Debt Fund
- SBI Equity Hybrid Fund
- Mirae Asset Hybrid Equity Fund
- ICICI Prudential Balanced Advantage Fund
You can see the schemes vary not just in fixed income allocation, but also in allocation to different credit ratings.
A few of these have exposure to their own FMPs and equity ETFs. This is wrong. I am not sure why these schemes would do that. There was investment in REITs and InvITs too, for which there was no credit classification provided. Have added FMPs, REITs and InvITs to others.
As mentioned in the posts on safety of debts, the lower the AA and below exposure, the better it is. Within AA rated portfolio, I am comfortable if the investment is in bonds from banks.
The equity portions of hybrid funds are so volatile that we tend to ignore the potential problems in fixed income portfolios of hybrid funds. The fixed income portfolio of the hybrid schemes can carry a lot of risk. And not just credit risk. There can be interest rate risk too. In my opinion, volatility due to the interest rate risk in government securities pales in comparison to volatility of equity portfolio. Hence, I will be more bothered due to credit risk in the portfolio.
I prefer that the fund manager tries to generate good returns in the equity portfolio. I am not fine with reaching for yields in the fixed income portfolio.
By the way, you can get an idea about the credit quality of the fixed income portfolio of your hybrid funds on ValueResearch. Here is the snapshot for HDFC Hybrid Equity fund.
By the way, these portfolios that I have shown look fine. That’s not always the case.
Now, look at Nippon India Hybrid Equity Fund.
The exposure to A and below is very high. I am not comfortable with such high exposure to A and below rated securities.
You must check for your scheme and decide whether you should stay in the scheme.
Additional Links
ICICI Prudential Mutual Fund Monthly Portfolio Disclosures
SBI MF Monthly Portfolio Disclosures
HDFC MF Monthly Portfolio Disclosures
Mirae MF Monthly Portfolio Disclosures
Note: I used to like hybrid funds (aggressive hybrid funds or erstwhile balanced funds) a lot. I still like them. However, my affinity for hybrid funds has gone down over the last couple of years. A few clients also pushed me to think deeper about this and I prefer much simpler portfolios now.
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