The pros and cons of conservative hybrid funds

George H. Joseph: We Since the average spend ratio for the category is very high, we have therefore kept the spend ratio very low: – 1% is the spend ratio. It is at the time of NFO and post-NFO, that we plan to reduce the expense ratio to 16 pips (percentage in points). This will be a clear winner from a spend ratio perspective within the category.

Second, the maturity profile of many debt securities within the category has been very high. We want to bring liquidity into the portfolio, so that investors are comfortable investing money at all times. And if you want to opt out, you should be able to.

On the debt side, we will have a dynamic debt allocation mix and the modified duration will be less than five years.

If you look at the portfolio, 70-80% will be in G-Sec (government securities) of various maturities, and 20% will be in PSU bonds, ie AAA bonds. The quality of the portfolio will be very high.

Now, when it comes to sovereign rating, there is no liquidity risk. You can sell any day with no impact fees. This is how we manage our dynamic bond portfolio. We more or less mimic the dynamic bond portfolio.

On the equity side, 10-25% is the leeway that SEBI offers in this category. Instead of opting for arbitrage opportunities – which is another way of running a regular savings product – because arbitrage rates can crash to less than 3% or below rates, we spend at the equity level at 10-25%. We manage the dynamic bond – balance advantage for ITI Mutual Fund, in the same way.

A dynamic asset allocation product like the Balanced Benefit fund is doing reasonably well. Similarly, we will also move the equity allocation by 10-25% in this conservative hybrid fund depending on the asset allocation needs we will have.

We will only invest in Nifty 50 stocks or probably the index itself, so you are mimicking the passive strategy in terms of stock picking. Active dynamic asset allocation is between 10-25% on the equity side. For debt, we will follow an active strategy keeping in mind the liquidity profile.

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