NFO review: Motilal Oswal Equity Hybrid Fund debuts, includes cash flow planMotilal Oswal Mutual Fund, famous for its ‘buy right sit tight’ philosophy, has brought out its first equity hybrid fund. The offering, like its peers, aims to offer growth potential of equities but with significantly lower volatility. Plus, it has a cash flow plan that is suited for investors who want regular payouts. The fund wants to have a large cap bias in terms of its equity allocation, while the debt portion would have an optimum mix of corporate bond and market instruments. Hybrid funds are best suited for investors who are entering the market with a clear intention of effectively dealing with market volatility and risk. Read on to know more and find out RupeeIQ’s view at the end.  

Fund construct – Motilal Oswal Equity Hybrid Fund is an open-ended hybrid scheme investing predominantly in equity and equity related instruments.

The fund endeavours to keep the exposure restricted to a narrow band of 65%-70% in equity and the balance in debt. This will give it tax advantages akin to a pure equity fund.

The fund will have a mixture of 65% -80% in equity, a multi-cap portfolio with a large cap bias. The fund will have a bottom-up stock picking approach.

While the equity portfolio allocation is most watched, we believe investors should also look at the debt game of a hybrid fund. The Motilal Oswal Equity Hybrid Fund’s debt portion will consist of around 20-35% with an optimum mix of corporate bond and market instruments. The fund strives to get exposure to high-quality short-duration accrual instruments maintaining high liquidity.

Interestingly, the fund has no intent to take credit or duration risk. This is a positive, given its mandate.

The scheme is benchmarked against the CRISIL Hybrid 35+65 Aggressive TRI (Total Return Index).

The fund will be managed by Siddharth Bothra and Akash Singhania (equity component), while Abhiroop Mukherjee will oversee the debt portion.

What’s interesting – The fund house knows that investors choosing to invest into equity-oriented funds even have the choice of investing in small and midcap funds but what is special about hybrid funds? Since hybrid funds are supposed to be less volatile, its portfolio constituents should reflect the same intention.

So, the equity portion of an equity hybrid fund should ideally have stocks with low beta (a beta less than market means they swing less). The fixed income portion should ideally be conservative in credit and duration to return in a stable range. If the fund is able to do these two tasks, it should be a safer option than many peers.

The special feature in the fund – Equity hybrid funds have the potential to deliver equity-like performance, with significantly reduced volatility. This is done by regular rebalancing in favour of 65:35 equity-debt. The Motilal Oswal Equity Hybrid Fund comes without a dividend option. Instead, there is a cash flow plan for those investors who want a regular cash flow for their planned needs, similar to a systematic withdrawal plan (SWP). This facility will provide a regular source of funds from their invested corpus at a chosen rate and frequency. Do remember this is subject to availability of balance in the investors’ folio.

The cash flow plan allows investors to select at the desired level of monthly, quarterly or annual cash flow from options of 7.5%, 10% and 12%. If the underlying asset class combination and the fund delivers, say 12% compounded over a long period of time and investors are taking regular cash flow out at the rate of, say 10%, then the cash flow requirements are met in a predictable fashion. Also, the capital remains intact with some potential for further appreciation. Please note that if the withdrawal amount is beyond 12% p.a. of original investment cost, the normal exit load applies to the amount greater than 12% per annum.

Tax efficiency – We have earlier mentioned how equity hybrid funds are tax efficient. This is due to the equity fund advantages that an equity hybrid fund has with 65% net stock exposure, and the rest 35% is in debt. All this in one single product. If one were to allocate individually 65% to an equity scheme and 35% to a fixed income scheme and then manage the asset allocation then each rebalancing event would invite tax implications.

On the other hand, intra-scheme rebalancing events within the equity hybrid fund do not invite any tax implications.

Since an equity hybrid fund for taxation purposes is treated as an equity fund, on redemption the short-term capital gains would be at the rate of 15% and long-term capital gains would be at the rate of 10%. This is unlike the separate tax implications of debt and equity if the allocation is done individually.

Also, do remember that in an equity hybrid fund the 35% debt allocation also enjoys equity-like taxation.

Avoid dividend tax: Many investors have been opting for dividend plans thinking that dividends are a bankable instrument to receive regular cash flow. But the introduction of a 10% distribution tax on equity mutual fund dividends clearly reduces the attractiveness of dividends as a mechanism to fulfil cashflow requirements. This is where the cash flow plan is clearly more tax efficient. The cash flow plan also makes the job of getting a predictable sum of money easy.

NFO period – The fund has opened on Aug 24 and will close on Sep 7.

Loads – There is no entry load. The exit load is 1% if redeemed on or before 1 year from the date of allotment. If redeemed after 1 year from the date of allotment, there is no exit load.

Do note that there is no exit load for switch between Motilal Oswal Focused 25 Fund, Motilal Oswal Midcap 30 Fund, Motilal Oswal Multicap 35 Fund & Motilal Oswal Dynamic Fund.

RupeeIQ take – Equity hybrid funds are a great category for investors. We like the way Motilal Oswal Cash Flow Plan wants to meet investor expectations. This cash flow plan ensures that all your cash flow requirements would be met, and capital would still be available with the same potential for growth. It is an ideal option for people who want an annuity kind of arrangement or for people looking to park a retirement corpus while preserving the growth potential and at the same time fulfilling the need for regular cash flow. Motilal Oswal MF’s equity expertise is well-known, with their QLGP mantra now part of stock market folklore. It will be interesting to see how the debt portion of the fund will be managed.

Disclaimer: This article is only for informational purposes. Investors should discuss with their financial advisor the scope of having this fund in their equity fund portfolio.

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Staff Writer

This article is written by RupeeIQ editorial staff.