Given the volatility in the equity market that is scaling new highs, investors with a medium risk appetite can consider allocating part of their assets to hybrid mutual funds.

These funds, investing both in equity and debt, help contain the downside while adding spice to returns during market rallies.

Hybrid equity-oriented funds, which allocate more than 65 per cent of their assets to equity and the rest to debt, also enjoy tax benefit.

As they are treated as equity-oriented funds, both dividend income and long-term capital gains (after one year) are exempt from tax.

L&T India Prudence is one such fund from this category, which has generated consistent, risk-adjusted, return since its launch.

While the fund’s performance in 2016 was mediocre, it has delivered notable returns so far this year (year-to-date). Also, its performance over the long run has been noteworthy and comparable to those of large-cap diversified equity funds.

Steady performance

The fund has not only delivered higher returns during market rallies but also cushioned losses well during market downturns.

For instance, it proved its mettle by outperforming peers in the bull phases of 2012 and 2014 and containing losses in the lacklustre 2015 market.

However, the fund delivered relatively lower returns during 2016 as it had increased exposure to debt in the period from mid-2015 to early-2016, missing the action in equities. The reduction in mid-cap exposure also impacted its performance.

But the fund was quick to increase its exposure to equities, mid-cap stocks at that, spicing up returns once again.

This has helped it top the charts in recent times.

Balanced portfolio

The fund has maintained a well-balanced portfolio by allocating 65-73 per cent to equities and the rest to debt over the last two years.

On the equity side, the fund follows a multi-cap approach, investing across sectors and market capitalisation. It follows a bottom-up approach while cherry-picking stocks.

The large vs mid-caps ratio stood at 82:18 as per the fund’s latest equity portfolio. Banks (14 per cent; a chunk in private sector banks), Construction Projects (8.2 per cent) and Finance (5.4 per cent) are the top three sectors.

L&T, ITC and ICICI Bank are the top stocks, with holding in no one stock exceeding 3.5 per cent.

In the fixed income portfolio, the fund manager has followed a relatively conservative approach, taking lower duration calls. Over the last six months, the fund has more than halved its exposure in government securities (from 13 to 5 per cent) and doubled its exposure to corporate bonds (from 9 to 18 per cent).

The fund’s exposure to lower-rated bonds has been minimal, barring the recent inclusion of investment in AA instruments (4.7 per cent as of May 2017).

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