With markets getting too volatile for the faint-hearted investors who are being haunted by the fear of steep correction ahead, raising allocation to equity any further is no less than a risky proposition. Consequently, retail investors are being recommended to invest in a mix of equity and debt so that not only they don’t miss out on the market upside (if it’s still there) but can also lower their risk by investing a portion in debt securities.
One can, therefore, explore the idea of investing in hybrid mutual funds which serve this purpose by investing in a mix of equity and debt securities.
Alekh Yadav, Head of Investment Products, Sanctum Wealth says, “Hybrid funds dynamically allocate between equity and debt based on market conditions, which can lead to smoother outcomes for investors. For retail investors with a long time horizon—such as young individuals saving for retirement—taking on the capital loss and short-term volatility associated with equity investments can be worthwhile, as they may benefit from higher potential returns.”
Types of hybrid mutual funds
There are seven types of hybrid mutual funds based on their allocation to equity and debt.
When allocation to equity is between 10 to 25 percent, hybrid mutual funds are known as conservative funds. When the equity allocation ranges between 40 to 60 percent, they are known as ‘balanced hybrid funds’, and when the equity allocation is highest (between 65 to 80 per cent), they are known as ‘aggressive hybrid funds’.
Another interesting category of hybrid mutual funds is dynamic asset allocation wherein the allocation between equity and debt is managed dynamically i.e., 0 to 100 percent in equity as well as debt.
One category of hybrid mutual funds is referred to as ‘Equity Savings’, wherein allocation to equity and equity-related instruments is minimum of 65 percent, 10 percent to debt instruments and a small portion to derivatives as mentioned in the SID.
| Hybrid Mutual Funds | Details |
| Number of schemes | 159 |
| Asset size | ₹8.74 lakh crore |
| Inflows in Sept | ₹4,901 crore |
What wealth advisors say
We spoke to a number of wealth advisors who advise investors to opt for hybrid mutual funds given the market scenario which is riddled with volatility and risk. Currently, benchmark indices are trading at high valuations with Nifty being traded at the P/E ratio of 23.5 and Sensex at 23.9 (as on Oct 9).
In view of this, investing a portion in debt, bonds, gold and other safe assets is rational as well as advisable. This is what experts say.
Manuj Jain, CFA, Head Products at WhiteOak Capital AMC explains the fundamentals of investing in order to highlight the benefits of hybrid mutual funds. “Asset Allocation is the 9th Wonder of the World. It can help you become wealthy and stay wealthy. Returns from the equity market have been volatile in the past and will likely remain so in the future. Local and global events will continue to ensure market cycles. Market valuations are mean-reverting, and by employing dynamic asset allocation between equity, debt, gold, etc., an investor can benefit from this volatility,” says Jain.
“It sounds logical and simple to allocate more to equity when others are fearful (i.e., during periods of low equity market valuations) and to reduce equity exposure when others are greedy (i.e., during periods of high equity market valuations). However, in reality, psychological barriers like greed and fear often lead us to do the opposite, causing us to miss out on potential gains. Additionally, there are operational challenges when executing dynamic asset allocation, such as tax considerations, transaction costs, and time constraints,” he adds.
“These challenges make it nearly impossible for most investors to benefit from volatility by successfully implementing dynamic asset allocation between equity, debt, gold, etc. Hybrid mutual fund schemes—such as Balanced Advantage Funds or Multi-Asset Allocation Funds—offer a hassle-free and tax-efficient way to participate in various asset classes and achieve optimal risk-adjusted returns,” he explains.
While echoing similar sentiments, Nitin Rao, Head Products & Proposition, Epsilon Money Mart, says, “A first-time investor should consider flexi caps funds as a good entry point for building a long-term portfolio. An existing investor can consider this phase to realign his asset allocation. However, it’s important for any investor not to take any investment decisions in haste while markets are going through a volatile phase.”
“Hybrid Schemes are appropriate products for retail investors not only for volatile periods but for the long term too. In an asset allocation plan for the long term there should definitely be some exposure towards hybrids for better diversification. For investors new to equity & related volatility, hybrid products are suitable stepping stone from fixed income towards equity,” said Sorbh Gupta, Senior Fund Manager, Equities, Bajaj Finserv AMC
At the portfolio level
Meanwhile, Shweta Rajani, Head, Mutual Funds of Anand Rathi Wealth, does not endorse the idea of investing in hybrid funds, “When choosing between hybrid funds and pure equity funds, we recommend investors invest in pure equity funds, as hybrid funds do not offer control over asset allocation as may be desired by an individual. Additionally, their tax treatment can vary from fund to fund. A fund with equity exposure of more than 65% will be taxed under equity gains; otherwise, it will be taxed under debt gains, which will further create a taxation inconvenience for investors,” she reasons.
“We recommend that investors invest with a 70/ 80: 30/ 20 allocation in equity and debt at the portfolio level if one has an horizon of more than 5 years to be able to create long term wealth while keeping risk under check. During volatile market situations like the current ones where market correction is more due to news while fundamentals are intact, investors should use this as an opportunity to rebalance portfolio and fill any equity allocation gap. One can look at an STP over a period of 6 to 8 weeks. This strategy will help them invest at a better average cost,” she adds.