Last Updated on May 7, 2021 at 7:27 am
This is a review of Parag Parikh Conservative Hybrid Fund, an open-ended hybrid scheme investing predominantly in debt instruments. The scheme NFO period is between 7th to 21st May 2021. Classified as a conservative hybrid fund, the scheme will invest 10% to 25% of its assets in equity and 75% to 90% in bonds.
The interest in this NFO among investors can only be classified as bizarre. Not one of the ten-plus reader who wanted a review from freefincal could say why they wanted to invest in this fund! A few of them excited that this fund invests in REITS and InvITs! Is this the only fund to say they would allocate 0 to 10% to REITs and InvITs? And what possible difference could 0 to 10% do to a portfolio? Stop looking at the turtle in the brochure! Look at the asset allocation! Brand advocacy is injurious to personal finance.
The AMC presentation says the scheme has the ” flexibility to invest across various categories of Debt securities” and calls this “a simpler and unambiguous
debt product”. If ever there was a contradiction in terms, this is one. There is nothing simple and unambiguous about a fund that freely invests across debt categories and a portfolio that “will comprise of a combination of ‘accrual’ and ‘duration.’
securities”.
They further state, “It is ‘conservative’ in the sense that most of the corpus is invested in a mix of accrual and duration instruments without taking on excessive credit risk”. Even if you are an AMC fanboy who “believes” that fund will not suffer credit events, there is plenty of volatility in duration play.
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Therefore the term conservative should not be misunderstood. It simply means, relative to an equity fund, the NAV volatility would be lower. That is all. The AMC website claims, “The key advantage of PPCHF is: It is a credible and tax-efficient alternative to certain fixed income instruments (like bank fixed deposits), offering the scope to earn income along with the prospect of growth in Net Asset Value (NAV) when held for a reasonably long period.”
If investors misunderstand this statement as a way to get better returns than an FD’, they would first get the “experience” of “principal at risk” before any possible returns. The AMC has a good track record of investing in equity, but that only accounts for 10-25% of the portfolio.
There are so many unknowns here. We do not know the nature of the debt portfolio. Sure they say it will have gilts, PSU bonds and AAA bonds, but the scheme also has the freedom to inevst anywhere in the debt space. At the very least, those interested should wait and watch the portfolio credit quality for a while.
Perhaps even more dangerous is, they can inevst in bonds of any duration. This means the interest risk, aka duration risk, aka demand-supply risk, is completely unknown. The scheme presentation says the fund can be considered by investors ” Not attempting to try to profit from every move in interest rates through active trading in debt securities”.
This would mean the fund itself would not churn the debt portfolio too much. So all the more reason why the average portfolio duration of the fund (and how it changes) has to be studied before investing. Readers may recall our comparison of three different gilts funds: SBI vs ICICI vs HDFC in How to choose a gilt mutual fund.
While Parag Parikh Conservative Hybrid Fund may not change average portfolio maturity like the SBI or ICICI gilt funds, they could still track long-term interest rate movements like HDFC gilt fund. The point is, we do not know what they will do, and we have to wait and watch. Until we know this, we cannot decide the suitable investment duration for this fund. They say for three years or more, but only the bond portfolio and how it varies can throw light on this.
Regarding “income generation”, those who want an income from a mutual fund should select stabler funds like overnight, liquid, money market or arbitrage funds. Just as it is a mistake to mix insurance and investment, it is a mistake to mix income generation and capital appreciation in mutual funds.
Also, as pointed out recently – Are hybrid mutual funds less risky than equity mutual funds? – the volatility of conservative hybrid funds is “somewhere” in-between equity and debt funds. This makes it hard for investors to peg their risk and return expectations.
During March 2020, when Nifty 50 TRI fell by 23%. These are the monthly returns of conservative hybrid funds. Notice the wide range of losses. It is quite hard to peg down risk in this category.
| Scheme Name | March 2020 monthly return |
| NIFTY 50 – TRI | -23.0 |
| Aditya Birla SL Regular Savings Fund(G)-Direct Plan | -9.2 |
| Axis Regular Saver Fund(G)-Direct Plan | -4.7 |
| Baroda Conservative Hybrid Fund(G)-Direct Plan | -0.9 |
| BNP Paribas Conservative Hybrid Fund(G)-Direct Plan | -3.9 |
| BOI AXA Conservative Hybrid Fund(G)-Direct Plan | -3.7 |
| Canara Rob Conservative Hybrid Fund(G)-Direct Plan | -5.2 |
| DSP Regular Savings Fund(G)-Direct Plan | -7.2 |
| Franklin India Debt Hybrid Fund(G)-Direct Plan | -7.3 |
| HDFC Hybrid Debt Fund(G)-Direct Plan | -6.3 |
| HSBC Regular Savings Fund(G)-Direct Plan | -5.5 |
| ICICI Pru Regular Savings Fund(G)-Direct Plan | -4.6 |
| IDFC Regular Savings Fund(G)-Direct Plan | -6.2 |
| Indiabulls Savings Income Fund(G)-Direct Plan | -3.6 |
| Kotak Debt Hybrid Fund(G)-Direct Plan | -6.6 |
| L&T Conservative Hybrid Fund(G)-Direct Plan | -5.3 |
| LIC MF Debt Hybrid Fund(G)-Direct Plan | -3.0 |
| Navi Regular Savings Fund(G)-Direct Plan | -6.0 |
| Nippon India Hybrid Bond Fund(G)-Direct Plan | -10.2 |
| SBI Debt Hybrid Fund(G)-Direct Plan | -6.9 |
| Sundaram Debt Oriented Hybrid Fund(G)-Direct Plan | -6.1 |
| UTI Regular Savings Fund(G)-Direct Plan | -6.2 |
There is nothing special about Parag Parikh Conservative Hybrid Fund, and they too would meet the same fate during a crash. Such funds are not suitable for “income generation”. Investors expect the “conservative” part to kick in when there is a crash and the “hybrid” part to kick in when there is a bull run. This rarely happens, and they are likely to be disappointed.
In summary, even if you are a die-hard fan of the AMC and even if you are only investing without any actual need, or after investing a need because it is from Parag Parikh AMC (yes, this is “vera level” financial literacy!), there are many unknowns associated with Parag Parikh Conservative Hybrid Fund, and you should wait for at least a year while studying monthly factsheets before thinking of investing.
In our opinion, there is nothing special about this offer, and investors should stay away from conservative hybrid funds altogether because it is too risky for the short-term, too conservative for the long-term and too hazy for the medium term.
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