Debt or equity? Hybrid is the answer

Mutual funds (MFs) are now betting on hybrid product launches to ramp up their assets and their investor base.

Indifferent debt returns and volatile equity markets have made fund houses look seriously at launching hybrid products to attract new investors into their fold.

The last few weeks have seen as many as three high profile fund houses launching differently positioned hybrid products. The relatively new but high performing HSBC Mutual launched its first monthly income plan (MIP).

This was followed by Tata Mutual launching the Tata MIP Plus and the latest to join the fray was Prudential ICICI Mutual Fund with the launch of Pru ICICI Income Multiplier Fund.

Hybrid products contain a mix of debt and equity in their portfolios. These can vary from being equity oriented, such as balanced funds that contain 50 per cent or more in equities, to debt-oriented where only 15-30 per cent of the corpus is in equities and the rest in debt to conservative MIPs containing a small proportion of equity, depending on the risk appetite of the investor.

Sanjay Prakash, chief executive officer, HSBC Mutual Fund, says, "The return from bond funds is expected to be lower and people are looking to enhance their earnings by taking exposure to equities also." He adds that the retail response to their MIP has been excellent.

But why this sudden spate of new launches? Ved Prakash Chaturvedi, chief executive officer, Tata Mutual Fund, puts forth the rationale for Tata MIP Plus as "since we already had a successful product in Tata Monthly Income Fund, which invests up to 10 per cent in equities and has given 45 uninterrupted monthly dividends since inception, we thought it best not to tamper with it but to launch a new product which can go higher up on equities. The idea for this product was generated by feedback from investors themselves. "

Says a fund manager, "Given the current circumstance, hybrid products could be the best bet for investors looking at a medium-term investment horizon as returns from debt funds can only be expected to be moderate in the foreseeable future."

Fund analysts opine that for fund houses launching hybrid products such as the MIPs, it is vital that they have a track record of managing successful equity schemes through the bear and bull markets.

Since the large portion of debt investment is only there to provide stability of returns, it is the smaller equity part that has to be managed astutely to give the extra push in returns.

The fund managers not only need to proactively manage the equity exposure in such a case, but they also pick up quality stocks to build a conservative and a diversified portfolio.

And the three players to launch hybrid funds are expected to draw heavily from their expertise in managing equity funds such as HSBC Equity, Pru ICICI Power and Tata Equity Opportunities Fund.

Industry observers note that it is always beneficial for a fund house to launch IPOs for new funds rather than carving out options from existing schemes.

Added to the attraction of units being made available at par, it is also the fact that an IPO helps the fund house to energise its marketing activities and spread its awareness to a larger number of towns and cities.

Tata Mutual Fund is venturing into 75 cities and towns for its IPO, according to the company. And more often than not, it helps the fund house to market its other products in the same cities in the longer run.