Hybrid schemes in the past have delivered an inconsistent performance and offer no advantage for investors. Being closed-ended makes it worse

SBI Mutual Fund plans to launch a series of close ended hybrid schemes with tenures ranging from one year to five years. The exact duration of each series under the scheme shall be decided at the time of launch of the respective series. The scheme—SBI Dual Advantage Fund Series–(XX)—would invest over 65% in debt and money market instruments and the remaining part of the portfolio would be invested in units of equity oriented mutual funds and gold exchange traded schemes. Despite the high risk associated with the metal, many fund houses include gold as an asset class in such hybrid schemes.
 

In this scheme, the allocation to gold can go up to a maximum of 35% of the portfolio. The performance of the scheme would be dependent on the market-timing skills of the fund manager to actively move in and out of equities, bonds and gold. Predicting the movement of gold and interest rates are challenging tasks, even for the best of professionals. This will mean that the fund will most likely do a poor job of moving in and out of gold and debt products. That apart, how will an investor decide how much to put into such schemes when he already has money invested in equities, bank fixed deposits and gold separately?
 

In an article published a few months back (Read: Hybrid Gold Schemes: No Golden Touch), we analysed the performance of hybrid schemes investing in gold. Performance of these schemes has not been great over the past one year. Inflation has gone up by over 9% over the past year, but gold, which has always been considered a hedge against inflation, has declined in value. The recent sharp correction in the price of gold has not only come as a shock to many investors, it has also questioned many beliefs surrounding the asset. Out of the 24-odd schemes, as many as six schemes had an allocation of more than 25% to gold. All the six schemes have delivered a negative return over the past six-month period and were the worst performers among all the schemes. Just seven schemes have a track record of more than three years. But although gold has risen sharply compared to equity indices in this period, the returns of these schemes have ranged between 6% and 7%.
 

Similar schemes from SBI Mutual Fund have put up a mixed performance over the past one-year, three-year and five-year periods. Such inconsistent performance is one of the reasons hybrid schemes serve no additional value to investors. Below is the performance of the schemes:
 

Rajeev Radhakrishnan is the designated fund manager for the debt part of the portfolio. He has a total experience of 10 years in funds management with around 8 years in Fixed Income funds management and dealing. Richard D’souza, will be managing the equity portion of the portfolio. He has over 19 years of work experience in equities as a portfolio manager.

Other details of the scheme

Benchmark: Crisil MIP Blended Fund Index
 

Minimum Amount for Application in the NFO: Rs. 5,000/- and in multiples of Re. 1/- thereafter
 

Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a): Upto 2.25%
 

Additional expenses under regulation 52(6A)(c): Upto 0.20%
 

Additional expenses for gross new inflows from specified cities: Upto 0.30%
 

Exit load: NA as close-ended scheme