A new look at the hybrid category of mutual fund schemes after the new categorization kicks in. Read my article below:
Hybrid funds under the new categorization
The English translation is as under:
Conservative Hybrid Mutual Fund Schemes
As SEBI’s circular of scheme categorization and rationalization is getting implemented, we would look at some changes in the balanced funds and MIP that one needs to keep in mind going forward.
Under the new categorization, six different sub-categories are allowed under the hybrid category. These are:
- Conservative Hybrid Fund
- Balanced Hybrid Fund or Aggressive Hybrid Fund
- Dynamic Asset Allocation Fund (also called Balanced Advantage Fund)
- Multi Asset Allocation Fund
- Arbitrage Fund, and
- Equity Savings Fund
In today’s article, we will cover the first category, i.e. conservative hybrid fund. Under the header “uniform description of the scheme”, the scheme is described as “An open end hybrid scheme investing predominantly in debt instruments”. The asset allocation of the scheme would be as under:
Investment in equity and equity related instruments – between 10% and 25% of total assets
Investment in debt instruments – between 75% and 90% of total assets
As you may recall, this is no different from the Monthly Income Plans that were quite popular earlier.
The problem with the Monthly Income Plans (or MIP) was the wrong impression that new investors got from the name of the scheme.
The schemes offered multiple options, including monthly dividend, quarterly dividend, annual dividend and growth. As we can see, there are multiple dividend options with frequencies other than monthly, too. The growth option retains all the earnings in the scheme and does not distribute it to the investors, allowing the value to grow. While offering different income options or even growth opportunity would be good for the investors, the name caused confusion.
Though, there are multiple options for dividend, the same is never guaranteed. Thee have been instances, though rarely, that some schemes skipped dividends. There are numerous instances where the dividend amount changed over the periods. Thus, the income could fluctuate, too.
In order to avoid the confusion, SEBI had made it mandatory that a line should be added below the scheme name, indicating that though the scheme name is Monthly Income Plan, there may be no monthly income.
Now with the new name for the category, the confusion is removed.
Investors looking for a safe portfolio that has the potential to generate higher returns than traditional debt instruments may consider investing in this category. However, it is important to understand that the scheme may, occasionally, deliver lower returns, too.