Fund Call. Principal Hybrid Equity: Cushions crashes and participates in upsides

If you are worried about market volatility ahead of the elections and do not want to take too much risk, an aggressive hybrid fund will be a good choice. With a maximum of 35 per cent exposure to debt, these funds help cushion any decline in NAV due to a market fall. At the same time, the mandate to have at least a 65 per cent equity exposure will help the funds participate in upsides, if any.

Principal Hybrid Equity is an ideal option in this category. Earlier known as Principal Balanced, the fund was renamed following SEBI’s new scheme categorisation norms. Other attributes of the fund remain unchanged.

Strategy and performance

The scheme plays it cautious across all market conditions, rarely increasing its equity holdings above 70 per cent. In both the bull market of 2017 as well the iffy markets of 2018, for instance, the fund held only 65-68 per cent in equities. Yet, it managed to outperform the category average returns in these years. In the 2017 rally, the scheme benefited from higher mid- and small-cap allocations. Reduced holdings in troubled spaces such as software and pharma at that point in time also helped. In 2018, the fund rightly added defensives such as consumer non-durables to navigate the volatile market.

Holdings in software stocks was inched up in the portfolio in time to benefit from the bettering prospects as well as the rupee depreciation in 2018. Besides, the fund also took to the safety of large-cap stocks to beat market volatility, last year. Allocations to mid- and small-caps, which stood at about 25 per cent in the beginning of 2018, came down to below 20 per cent by the end of the year.

A few right moves on the debt side also helped. As yields on 10-year government securities rose from about 6.5 per cent in September 2017 to over 8 per cent a year later, the fund benefited from reducing exposures to these instruments.

Thanks to its deft strategy, the fund had been a consistent outperformer earlier as well. It bettered the category average returns in the market rally of 2014 as well as the volatility of 2016. Overall, the scheme has beaten the category by up to 5.5 percentage points over one, three and five years.

Portfolio choices

Principal Hybrid Equity usually holds a diffused portfolio of about 60 stocks, with holdings in the top stocks at 3-4 per cent. Banking is the top sector preference. Over the past year, holdings in this space have been inched up steadily, with HDFC Bank, ICICI Bank, SBI and Axis Bank among the prominent holdings.

On the debt side, apart from adding to G-Secs based on market conditions, the fund usually prefers top-rated corporate debts/NCDs. It predominantly holds AAA and AA/AA+ rated instruments of companies such as NABARD, IRFC, PFC and HDFC.

Prominent mid- and small-cap stocks in the portfolio include Bajaj Electricals, SRF and Nalco. Given that the fall in mid- and small-cap stocks last year presents good buying opportunities at present, the fund has added a bit to its mid- and small-cap holdings in 2019.

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