NFO analysis: Parag Parikh Conservative Hybrid Fund

Parag Parikh (PPFAS) Mutual Fund has launched Parag Parikh Conservative Hybrid Fund on May 7, 2021. This scheme would be investing chiefly in debt instruments along with some equity allocation. It is an open-ended hybrid scheme investing predominantly in debt instruments. 

Neil Parag Parikh, Chairman & CEO of PPFAS Mutual Fund said, “We want to replicate the idea behind Parag Parikh Flexi Cap Fund on the debt side. The idea is to have a flexible model where we have the freedom to take advantage of market opportunities without being too constrained. Thus, the scheme will not be boxed into any particular type of debt like a short-term, government bond, or high yield. Parag Parikh Conservative Hybrid Fund will be our debt fund offering with a slice of equity exposure, REITs, and InvITs. The scheme could be considered as a 'one-stop shop' for your debt needs.” 

Rajeev Thakkar, Chief Investment Officer, PPFAS Mutual Fund said, “The scheme will adopt a flexible model that will allow the fund manager to move between accrual and duration-related instruments. These include the sovereign, state government, PSU, and corporate securities across all maturities. The fund will have 10 to 25 per cent exposure in equity and equity-related instruments. The allocation can be increased or reduced using arbitrage. The scheme will also be able to invest up to 10 per cent of its asset in units of real estate investment trusts (REITs) and infrastructure investment trusts (InvITS).” 

Parag Parikh Conservative Hybrid Fund’s new fund offer (NFO) subscription would close on May 21, 2021. It will further re-open for subscription on May 28, 2021. 

Click here to access its scheme information document. 

Objective 

The investment objective of the scheme is to generate regular income by investing predominantly in debt and money market instruments. Further, the scheme also seeks to generate long-term capital appreciation from the portion of equity investments under the scheme. 

Asset allocation 

The above asset allocation shows that at all times, it will not invest less than 75 per cent in debt and money market instruments while in the equities, it would have a minimum allocation of 10 per cent. Also, when it comes to debt, they would also be considering investing in securitised debt. Moreover, along with equity, they might also have exposure to REITs & InvITs. 

Benchmark 

The performance of this scheme will be benchmarked against CRISIL Hybrid 85+15 – Conservative Total Returns Index (TRI). Further, the composition of the said benchmark is such that, it is most suited for comparing the performance of the scheme. However, its true peers would be other funds available in the conservative hybrid category. 

Investment strategy 

The objective of the equity strategy would be to build a portfolio of companies diversified across major industries, economic sectors and market capitalisation that offers an acceptable risk-reward balance. 

And when it comes to investment in debt, the scheme will retain the flexibility to invest in the entire range of debt securities (including securitised debt) and money market instruments. Moreover, investment in debt securities will be guided by the credit quality, liquidity, interest rates and their outlook. Apart from equity and debt, the scheme may also invest in the units of REITs & InvITs in order to diversify and would be subjected to necessary stipulations by the Securities & Exchange Board of India (SEBI) from time to time. 

Furthermore, subject to the regulations and the applicable guidelines, the scheme may also engage in stock lending activities. 

While constructing a debt portfolio, the fund manager would seek to play out the yield curve and exploit anomalies if any, post analysing the macro-economic environment, including future system liquidity, interest rates and inflation, and other considerations in the economy & markets. 

In order to mitigate and control risk, the investment team of the asset management company (AMC) will carry out rigorous credit evaluation of the issuer company proposed to be invested in. The credit evaluation will analyse the operating environment of the issuer, business model, management, governance practices, quality of the financials, the past track record as well as the future prospects of the issuer along with the issuer’s financial health. 

Fund manager 

This scheme will be co-managed by Rajeev Thakkar, the Chief Investment Officer and Equity Fund Manager of PPFAS Mutual Fund, followed by Raunak Onkar, an Equity Fund Manager and Raj Mehta, who is a Debt Fund Manager. All of them are highly qualified and experienced fund managers with a good amount of fund management experience. Apart from this scheme, they also manage and co-manage other schemes of Parag Parikh Mutual Fund. 

Our take 

At present, there are around 22 schemes available to invest in the conservative hybrid category. And almost 21 schemes have a net asset value (NAV) history of more than 3 years. In fact, 20 schemes in the category have a NAV history of more than 10 years. Therefore, we do have a great number of funds in the category with a fairly longer performance history available. Moreover, there are 16 such schemes that are benchmarked against a similar index like that of Parag Parikh Conservative Hybrid Fund. If we look at the average three-year compounded annual growth rate (CAGR) of these 16 schemes, then it stands at 6.46 per cent. Here, the maximum and minimum returns generated by any fund in the same period are 10.11 per cent and 0.35 per cent, respectively. Looking at the risk part, the average standard deviation of the category is around 4.14 per cent. Therefore, this means that the expected volatility on the upside as well as on the downside is not more than 5 per cent. 

Further, the debt part of Parag Parikh Conservative Hybrid Fund would be somewhat like that of a dynamic bond fund. So, if we look at the average three-year CAGR of dynamic bond funds, then it stands at around 7.5 per cent. Therefore, your pre-tax return expectations from conservative hybrid funds should not be more than 8 per cent to 9 per cent. And as they have more than 65 per cent in debt instruments, for taxation, it would be considered as a debt fund. Furthermore, though the name includes the word ‘conservative’ yet it’s not considered suitable for conservative investors. The debt part of this fund is indeed quite aggressive. However, it is quite early to comment on the risk part. Once we have a portfolio in place, we will have more clarity on the credit risk part. However, in terms of interest rate risk, as this is not a fund following a pure accrual strategy, this is prone to interest rate risk.