Debt cushion, equity kick

Conservative hybrid funds are designed for investors who want to participate in the growth potential of equities without taking on the full volatility associated with equity investing. These schemes predominantly invest 75-90 per cent of their portfolio in debt instruments while maintaining a modest equity allocation of 10-25 per cent, creating a balanced risk-return profile.

With debt forming the bulk of the portfolio, conservative hybrid funds generally experience smaller fluctuations than pure equity funds, yet they have the potential to generate better long-term returns than traditional fixed-income products. This makes them suitable for investors looking for a smoother investment journey.

The category is particularly relevant for risk-conscious investors, with investment horizon of around three- to five years, who seek capital appreciation but are uncomfortable with sharp market corrections.

Kotak Debt Hybrid Fund is one of the better-performing schemes in the category over the long term. Over the last 10 years, the fund has delivered a compounded annual growth rate (CAGR) of 8.8 per cent compared with the category average of 7.4 per cent.

The equity component of the fund follows a flexi-cap strategy, generally maintaining an equity allocation of 20-24 per cent.

Stock selection combines both top-down and bottom-up research. The fund first identifies broad macro themes such as consumption versus investment, domestic versus export-oriented businesses, and private sector versus public sector companies. Once these themes are identified, it selects sectors that are best positioned to benefit before narrowing down to individual stocks.

The fund follows its proprietary BMV (business, management and valuation) framework for stock selection. It first identifies businesses growing faster than their industry with scalable and sustainable growth. It then assesses management quality through corporate governance, accounting practices, forensic analysis, cash flows, balance sheet strength and execution. Finally, it evaluates valuations based on return ratios and long-term earnings potential, aiming to buy high-quality growth businesses at reasonable prices rather than chasing expensive growth.

The current equity portfolio has a distinct domestic orientation, focussing on companies that derive the majority of their revenues from India. The fund is overweight private sector banks and healthcare, while maintaining a neutral stance on technology with a preference for digital platform businesses over traditional IT services firms. It also has selective exposure to consumer discretionary stocks, supported by favourable long-term consumption trends.

As per the latest portfolio, the top three sector exposures were banks, automobiles and telecom. Over the last year, the fund increased exposure to banks, healthcare services and fintech companies while trimming exposure to IT, petroleum products and finance.

Around 70-75 per cent of the equity allocation is invested in large-cap companies, with the balance spread across select mid- and small-cap stocks.

The fund has been one of the few in the category to actively manage duration. It combines long-term strategic positioning with tactical adjustments, emphasising liquidity and yield curve positioning while minimising exposure to credit risk. Over the last five years, the fund’s modified duration has ranged between 1.8 years and 8.8 years, reflecting its active duration strategy.

Currently, the portfolio’s modified duration is maintained at around five years. The fund manager believes the RBI’s recent policy measures have lowered the risk of aggressive rate hikes over the next couple of months, helping bond yields ease. Measures to boost capital inflows could support demand for short- to medium-term corporate bonds and, if India is included in the Bloomberg Global Bond Index, long-duration government securities. Accordingly, the fund prefers stable carry through two- to five-year corpor...