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The recent volatility in the market, driven by the sharp fall in mid-cap stocks, has rattled investors, no doubt. But if you are a long-term investor looking to build wealth for a specific goal, avoiding equities altogether may not be prudent.
Good quality equity-oriented funds that can help cash in on the rally in equities, while providing a cushion through debt exposure, offer just the solution.
Before SEBI’s directive on categorisation and rationalisation of mutual fund schemes, balanced funds — both equity- and debt-oriented — were loosely defined, and varied across fund houses. SEBI has now defined hybrid schemes more rigidly, with six pre-set categories.
One of the categories of funds, Aggressive Hybrid Fund, in which SEBI mandates 65-80 per cent investment in equity, is good to opt for. Exposure of at least 65 per cent to equity gives ample opportunity to cash in on market rallies, while 20-35 per cent debt exposure offers some cushion in choppy markets.
ICICI Prudential Equity & Debt Fund — erstwhile ICICI Prudential Balanced Fund — which has been a steady performer over the long run, is a good fund to bet on.
Given that the fund has been investing 65-74 per cent in equity over the past 3-4 years, not much changes post the SEBI directive.
Over three- and five-year horizons, the fund has delivered 10-17 per cent returns, beating the category by about two percentage points.
Portfolio choices
While the fund predominantly invests in large-cap stocks on the equity side, it has made timely investments in mid-cap stocks as well, to boost returns, as it did in the 2014 rally.
Deft juggling between equity and debt has also helped it deliver category-beating returns. In the 2014 rally, for instance, the fund upped its equity exposure to 68-70 per cent most of the time, from 65-67 per cent through 2013. In the beginning of 2017, in light of rising markets, the fund brought down equity exposure to 65-68 per cent, from 70-75 per cent in the end of 2015.
Prudent sector and stock calls have also helped rake in good returns. In the 2014 rally, the fund latched on to cyclicals, while in 2016, its select picks in banking, power, and oil and gas helped deliver healthy returns.
On the debt side, too, the fund has been able to take the right calls. In the 2014 bond rally, the fund upped its exposure to long-term government securities to 19-20 per cent, subsequently paring it 15-16 per cent in the lacklustre 2015 market.
Steady performer
In 2017, in view of rising rates, it substantially cut down its exposure to government securities to 11-14 per cent of the portfolio. A top-quartile fund over long tenures, ICICI Pru Equity & Debt has managed to put up a good show across market cycles.
In 2017, however, it slightly underperformed its category. Reducing exposure to IT stocks (that made a comeback) and predominant exposure to large-cap stocks appear to have impacted returns.
Adding exposure to defensive tech stocks and paring holdings in banks this year should help the fund tide over volatility better.
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