Who should invest in Parag Parikh Conservative Hybrid Fund?

Published: July 26, 2021 at 8:43 am

Last Updated on July 26, 2021 at 10:02 am

The first fact sheet of Parag Parikh Conservative Hybrid Fund (PPCHF) is now available. The fund now has an AUM of Rs. 292 Crores. This provides some more clarity on the nature of the fund and who should invest in it. During the NFO period of the fund, we had pointed to several unknowns about the fund and why investors should either look elsewhere or at least wait a few months. See Parag Parikh Conservative Hybrid Fund Review.

Intending to address these unknowns, the fund house’s June 2021 factsheet begins with a note from the CIO. Rajeev Thakkar. The fund house is clear that the fund is not suitable for short-term needs: “If you have a goal to buy a car in say 2 years, a fixed deposit or a short duration fund or a Fixed Maturity Plan would be ideally suited and
PPCHF would not be appropriate.”

It says, “A minimum investment horizon of 3 years+ is recommended for this scheme”. Then goes on to say, “As can be seen from the portfolio, currently the investments are largely in the 6 to 7-year maturity bucket”. According to the Debt mutual fund screener (July 2021), a good 70.87% of the portfolio contains bonds with a tenure of more than 5Y. The average portfolio is 6.4 years.

The yield to maturity, modified duration (higher the value, more the volatility, more the interest rate risk) and average maturity (higher the value, more the volatility, more the interest rate risk) for gilt funds, for PPCHF and Parag Parikh Liquid Fund are tabulated below.

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FundYTM %Modified Duration (Years)Average Maturity (Years)
Nippon India ETF Long Term Gilt6.216.959.42
ICICI Pru Constant Maturity Gilt Fund(G)6.466.729.38
Invesco India Gilt Fund(G)6.126.579.83
ICICI Pru Gilt Fund(G)6.085.1314.27
Parag Parikh Conservative Hybrid Fund-Reg(G) 6.724.896.43
Baroda Gilt Fund(G)5.984.786.35
Nippon India Gilt Securities Fund(G)5.804.646.36
IDFC Gilt 2028 Index Fund-Reg(G)6.144.605.97
L&T Gilt Fund-Reg(G)5.884.585.88
IDFC Gilt 2027 Index Fund-Reg(G)6.094.465.59
Kotak Gilt Fund-Reg(G)5.924.3812.37
Axis Gilt Fund-Reg(G)5.604.3410.20
HDFC Gilt Fund(G)5.714.326.02
Tata Gilt Securities Fund-Reg(G)5.333.935.27
IDBI Gilt Fund(G)5.573.854.50
Nippon India ETF 5 Year Gilt5.433.483.98
PGIM India Gilt Fund(G)
Canara Rob Gilt Fund-Reg(G)4.712.393.25
UTI Gilt Fund-Reg(G)4.542.074.03
SBI Magnum Gilt Fund-Reg(G)4.501.954.00
Parag Parikh Liquid Fund-Reg(G) 3.370.110.12

PPCHF has a modified duration comparable to many gilt funds. The higher yield to maturity of PPCHF is due to its use of state govt bonds because of attractive yields. This does not have any direct bearing on scheme returns for an open-ended debt fund.

We confirmed with a bond expert that the market depth for state govt bonds is much lower than that for RBI or GOI bonds and the yield spread among different SDL (state development loans) is volatile compared to GOI bonds. This could well increase the volatility of PPCHF.

The fund may hold these bonds to maturity but the NAV will fluctuate as per daily market prices and being open-ended, investor returns will be affected in a good or bad way.

The fund also has the highest modified duration and second-highest average maturity in the conservative hybrid category. It also has the second-highest YTM without taking on credit risk. Please note these numbers change from month to month.

FundYTM %Modified Duration (Years)Average Maturity (Years)
 Kotak Debt Hybrid Fund(G)5.673.078.44
 Parag Parikh Conservative Hybrid Fund-Reg(G)6.724.896.43
 HSBC Regular Savings Fund(G)5.723.894.98
 Aditya Birla SL Regular Savings Fund(G)5.942.784.93
 Baroda Conservative Hybrid Fund(G)5.143.414.45
 UTI Regular Savings Fund-Reg(G)
 HDFC Hybrid Debt Fund(G)6.333.084.17
 ICICI Pru Regular Savings Fund(G)6.292.493.53
 Franklin India Debt Hybrid Fund(G)5.172.863.42
 IDFC Regular Savings Fund-Reg(G)4.982.452.96
 SBI Debt Hybrid Fund-Reg(G)5.482.262.94
 Axis Regular Saver Fund(G)5.402.092.82
 L&T Conservative Hybrid Fund-Reg(G)4.902.242.72
 DSP Regular Savings Fund-Reg(G)4.972.132.49
 Nippon India Hybrid Bond Fund(G)8.131.922.46
 Canara Rob Conservative Hybrid Fund-Reg(G)4.641.982.41
 Sundaram Debt Oriented Hybrid Fund(G)4.581.682.14
 BNP Paribas Conservative Hybrid Fund-Reg(G)3.621.581.98
 LIC MF Debt Hybrid Fund(G)4.181.441.73
 BOI AXA Conservative Hybrid Fund-Reg(G)4.030.951.11

The fund will not be too dynamic in terms of choosing bond duration: “PPCHF does not aim to be investing and moving between extreme ends of the maturity spectrum, say invest in short term treasury bills at some time and at other times invest in 30-year bonds”.

So both existing investors and potential investors should understand that the fund should be holding bonds that mature after a few years, say, 5-10 at all times. This means the NAV would be reasonably volatile. This means significant interest rate risk compared to a liquid fund.

The fund house believes that even if rates increase, it may not affect the bond market’s medium and long duration segment. They believe the market has already priced in the possibility of a rate hike. Only time will tell if their hunch is right or not – if they are right, long-term gilts should not be affected much if the RBI increases the overnight rate.

More importantly, it makes no sense to recommend a fund for 3+ years when the portfolio holds much longer duration bonds.

Later on in the note, we find this: “as long as the investor broadly has time horizons which are not too different from the fund investments, things should work out fine over the tenure of the investment on the interest rate risk front”.

Now, suppose I need money after 7Y, then if we take this note seriously, PPCHF is not a bad choice. It may be a reasonable choice in year one or two or three. However, after 4-5 years, the interest rate risk or how the NAV responds to demand and supply fluctuations will actually increase (for the investors) as her deadline to redeem approaches.

This is because, while our investment tenure decreases, the fund being open-ended will always be holding medium-term bonds in the portfolio. So their claim “medium-term
investors should not unduly worry about the NAV fluctuations” should be understood as medium-term investors should not worry about NAV fluctuations in the initial phase of their investment tenure.

This would mean she has to gradually shift from PPCHF to a liquid fund or SB acct well before the goal deadline. So there is an additional tax incidence involved (one for the switch and one in the SB acct).

While there is nothing terribly wrong with this approach, only a few investors would even appreciate that it is necessary. A money market fund or liquid fund, or arbitrage fund can get this job done will much lower volatility and maintenance for short-term goals.

Such advice “approximately match investment duration with funds average portfolio maturity” is quite common in the industry and seriously flawed. See Poor Debt Fund Advice: Match Investment Horizon With Fund Maturity Profile.

Can we use Parag Parikh Conservative Hybrid Fund for a long term goal? I have already discussed this in the review linked above. You can, but it is not recommended. For a long term goal, in any case, a good chunk of the portfolio should be in equity. So there is no need for a hybrid fund that invests a little bit in equity (10-25% in general and about 12% in June 2021). A gilt mutual fund can be effectively used for this purpose with lower fund manager risk.

Also, most investors have incorrect perceptions about a conservative hybrid fund. They expect it to provide great returns during a bull run and expect it not to fall during a crash. This is impossible.

Also, many stocks investors will not appreciate this portfolio, but they have made it clear it will be an income generator.

  • Coal India Ltd. 2.51%
  • Bajaj Auto Ltd. 2.49%
  • Petronet LNG Ltd  2.48%
  • ITC Ltd. 2.47%
  • Power Grid Corporation of India Ltd. 2.44%

Experienced investors (including retirees) who need a regular income source can use PPCHF, but this will depend on their net worth, how much is invested elsewhere and so on. So tread with caution with the aide of a SEBI registered fee-only advisor if necessary.

In summary, the first factsheet and accompanying note about Parag Parikh Conservative Hybrid Fund reveals that it would take on significant interest rate risk or duration risk (in between a money market fund and a gilt fund). Therfore we recommend investors avoid this fund for short-term goals (< 5Y). Investors with no prior debt fund experience should avoid this fund for medium-term goals as well (5-10 years).

We also feel that a gilt mutual fund is better suited for a long term portfolio than this fund. PPCHF can be considered for use in a retirement bucket strategy but only by those with considerable net worth, understanding and experience with open-ended debt mutual funds.

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