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Should You Invest In Hybrid Mutual Funds?

Last updated on: February 05, 2024 18:42 IST

Regardless of market levels, invest in stocks and equity mutual funds in a staggered manner.

Illustration: Dominic Xavier/Rediff.com
 

The bellwether Indian stock indices saw their worst fall in 18 months last month, with the BSE Sensex plunging over 1,600 points and the Nifty 50 dropping by 460 points. This happened at a time when the markets have been hovering near their lifetime highs.

Investors in equity mutual funds are worried as a sudden selloff could erode the value of their portfolios. Some mutual fund categories and investment strategies can help mitigate the impact of volatility.

Balanced Advantage Funds (BAFs)

These schemes, also known as dynamic asset allocation funds, invest in a mix of bonds and stocks depending on how attractively they are priced.

Fund houses use different models that consider factors such as value and momentum to decide the allocation between stocks and bonds (including arbitrage positions). Fund managers then pick stocks and bonds to design portfolios.

When stocks are quoting at around all-time highs, the valuation-driven BAFs have reduced their equity allocation and allocated more to bonds. Later, if the markets tank and stocks turn more attractive, they will allocate more to stocks.

This continuous process of reallocation provides investors with a smoother investment experience.

BAFs minimise risk and improve returns by adjusting the portfolio allocation during a market rally or correction, says S Sridharan, founder and chief executive officer, Wallet Wealth.

Multi-asset funds

Amid high valuation risk in equities and the possibility of volatility in the future, investors may also consider multi-asset funds (MAF). These funds invest across equities, bonds, precious metals and international equities.

Different asset classes perform at different times, so diversification pays off over time. Investing across a broad range of asset classes also makes the portfolio resilient, says Ravi Kumar T V, founder, Gaining Ground Investment.

Equity Savings Funds

These funds maintain a stock allocation ranging from a minimum of 15 per cent to a maximum of 35 per cent. The remainder is invested in bonds and arbitrage positions.

The objective is to provide a small stock allocation to investors seeking moderate equity exposure.

Investors with a lower risk appetite can consider equity savings funds, which offer a combination of equity, arbitrage, and fixed income, says Parul Maheshwari, a certified financial planner.

Both equity savings funds and BAFs maintain a gross equity exposure of 65 per cent by deploying money in spot-future arbitrage positions, even if their net equity exposure is far lower.

Hence, these schemes are taxed as equity mutual funds and investors pay tax on capital gains at lower rates.

Capital Protection Strategy

A higher allocation to debt can significantly reduce risks and safeguard capital.

Investors with a long-term view can deploy 70 per cent of their money in a well-managed short or medium-term debt fund and the balance in a well-managed flexi-cap fund.

Over five years, 70 per cent allocation can grow to 100, while the equity allocation can provide additional returns.

Debt provides stability to portfolios and allows one to earn a steady return.

Investors can build a robust debt portfolio through a mix of short-duration funds, fixed deposits, non-convertible debentures (NCDs) and G-Secs, says Maheshwari.

Don't Shun Equities

Despite the markets running up, avoiding equities altogether may not be a prudent investment strategy.

Investors might lose out on further gains if the markets continue to rise from current levels.

Stretched valuations and overbought scenarios are there for the short term.

Invest in large-cap equity-oriented funds as they promise worthwhile gains in the long term, says Sridharan.

Adds Ravi Kumar: Nobody can time the equity markets. Those having a long-term view should continue their systematic investments in equity funds.

Invest Over Time

Regardless of market levelS, invest in stocks and equity mutual funds in a staggered manner.

Use systematic investment plans (SIPs) or systematic transfer plans (STPs).

To invest a lump sum, choose a BAF or multi-asset fund, says Maheshwari.

Staggering out your investment will average out the cost of purchase of units and remove the risk arising from high market levels.


Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Ashish Narsale/Rediff.com

Sarbajeet K Sen
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