Principal Hybrid Equity Fund: Best performing aggressive hybrid fund in the last 3 years

Aggressive Hybrid Funds are equity oriented hybrid mutual fund schemes, where minimum equity allocation is 65%. Aggressive Hybrid Funds enjoy equity taxation. Long term capital gains (investment tenure of more than 1 year) up to Rs 1 Lakh are tax exempt; long term capital gains in excess of Rs 1 Lakh are taxed at 10%. Dividends paid by Balanced Funds are tax free in the hands of the investors but the fund house has to pay 10% Dividend Distribution Tax (DDT) before paying dividends to investors.

Principal Hybrid Equity Fund is the best performing aggressive hybrid fund in the past three years (please see the Top Performing Aggressive Hybrid Funds in our MF Research Section). The chart below shows the annualized returns of Principal Hybrid Fund versus the Aggressive Hybrid Fund category over trailing 1, 3, 5 and 10 years. You can see that the scheme outperformed the Aggressive Hybrid Fund category consistently over different trailing time-scales.

Source: Advisorkhoj Research

Principal Hybrid Equity Fund, formerly known as Principal Balanced Fund, was launched in January 2000 and has around Rs 1,601 Crores of Assets under Management (AUM). The AUM of the scheme multiplied several times over the past year or so, thanks to its strong performance. The expense ratio of the fund is a little on the higher side at 2.26%. Veteran fund manager P.V.K Mohan and Bekxy Kuriakose manage this scheme. Funds managed by these fund managers include top performing funds like Principal Growth Fund, Principal Tax Saving Fund etc. The chart below shows the Net Asset Value growth of Principal Hybrid Equity Fund over the last 5 years.

Source: Advisorkhoj Research

The chart below shows the annual performance of Principal Hybrid Equity Fund versus Aggressive Hybrid Funds category in each year over the past 5 years. You can see that the scheme outperformed the category in most years over the last 5 years.

Source: Advisorkhoj Research

Rolling Returns of Principal Hybrid Equity Fund

We have discussed many times in our blog that rolling returns is the best measure of mutual fund performance because it is not biased by specific market conditions like trailing and point to point returns are. The chart below shows the 3 year rolling returns of Principal Hybrid Equity Fund over the past 5 years. We have chosen a 3 year rolling returns period because investors should have at least 3 year investment tenor for investing in equity oriented hybrid funds. Over longer tenor aggressive hybrid funds can leverage the wealth creation potential of equity as an asset class.

Source: Advisorkhoj Rolling Returns Calculator

You can see that Principal Hybrid Equity Fund beat the Aggressive Hybrid Funds category consistently over 3 year rolling periods of in the last 5 years. Outperformance consistency across different market conditions is the hallmark of well managed funds. You can see that the minimum three year annualized rolling return was around 12%, implying that, investors would have always got double digit returns by investing in the fund with 3 year investment tenors over the last 5 years irrespective of market movements in the interim.

The maximum 3 year annualized rolling return of the Principal Hybrid Equity Fund was around 20.2%, which the maximum for the Aggressive Hybrid Funds category is 25%. As discussed earlier, the minimum three year rolling return of the scheme is 12.3%, while that of the category is 7.5%. This shows that the scheme was able to capture most of the market’s upside and at the same time provided greater stability in the difficult market conditions compared to the average Aggressive Hybrid Funds. The average 3 year annualized rolling return of the Principal Hybrid Equity Fund was 15.6%, while that of the Aggressive Hybrid Funds category was 14.4%. The median 3 year annualized rolling return of the scheme was 15.3%, while that of the category was 13%.

The chart below shows the consistency of 3 year rolling returns of Principal Hybrid Equity Fund versus the Aggressive Hybrid Funds category. You can see that Principal Hybrid Equity Fund is a much more consistent performer in the 8% to 20% returns range compared to its category peers.

Source: Advisorkhoj Rolling Returns Calculator

Strong Performance Consistency

The strong rolling returns consistency of Principal Hybrid Equity Fund manifests in the annual quartile ranks of the scheme in the Aggressive Hybrid Funds category in the last 5 years. The scheme was ranked in the top two quartiles 4 times in the last 5 years and in the top quartile, 3 times in the last 5 years, making this scheme one of the most consistent performers in the Aggressive Hybrid Funds category (please see our tool, Top Most Consistent Performers – Aggressive Hybrid Funds).

Asset Allocation and Portfolio Construction

The asset allocation mandate of Principal Hybrid Equity Fund as per SEBI’s category guidelines is 65% to 80% Equity; within equity there are no sub limits on market cap segments. The current asset allocation of the fund is 65% equities, 20% debt and around 15% cash or cash equivalents. The equity portion of the scheme portfolio has currently a large cap bias and Mid & Small Cap for alpha generation. The fund manager is quick to shed risk and move on tactically. The debt strategy of the Principal Hybrid Equity Fund’s portfolio is currently accrual based, with a maturity bias towards to the shorter end of the yield curve. Therefore, interest sensitivity of the scheme is limited. The chart below shows the top stocks and sector composition of the scheme portfolio.

Source: Advisorkhoj Research

Lump Sum and SIP Returns

The chart below shows the growth of Rs 100,000 invested in Principal Hybrid Equity Fund(Growth Option) over the last 5 years. You can see that your investment would have doubled in value over the last 5 years.

Source: Advisorkhoj Research

The chart below shows the return of Rs 5,000 monthly SIP in Principal Hybrid Equity Fund (Growth Option) over the last 5 years. With a cumulative investment of just Rs 3 lakhs you could have made a profit of around Rs 1.1 lakhs in the last 5 years through monthly SIP. The annualized SIP return over the last 5 years was nearly 12.5%.

Source: Advisorkhoj Research

Dividend History

The table below shows that Principal Hybrid Equity Fund has been paying regular monthly dividends for the last 2 years. The annual dividend yield is fairly high. Investors should, however, understand that mutual fund dividends are not assured. Mutual fund dividends are paid from the accumulated profits of the schemes. Fund houses can change the dividend payout rate (dividend per unit) and / or the frequency of dividend payment at their discretion.

Conclusion

Principal Hybrid Equity Fund has completed more than 18 years. The performance over the past three years or so has been exceptionally good. The scheme has also been a consistent performer over the past 5 years. Investors with moderately aggressive risk appetites can invest in Principal Hybrid Equity Fund both in lump sum and SIP with a sufficient long investment horizon.

If you are worried about market volatility when making lump sum investment, you can invest your lump sum money in a liquid fund of Principal Mutual Fund and then transfer systematically (STP) to Principal Equity Hybrid Fund over the next 3 to 6 months. The scheme can be volatile in the short term depending on market movements, but investors should be patient and remain invested till their financial goals associated with the investment is achieved. Investors should consult with their financial advisors if Principal Hybrid Equity Fund is suitable for their investment needs.