7 MinsMar 19, 2021
One of the first and foremost rules of investing is diversification i.e., to invest across asset classes, such as equity, debt, gold, real estate, etc. And an easy way to achieve this is through the mutual fund route. The most common category
of mutual funds that allows investing in more than one asset class is hybrid funds.
There are various hybrid funds for each type of investor (conservative or low risk-taker to aggressive or high risk-taker) that can help address certain medium term financial goals. Let us understand these sub categories in detail.
As per SEBI, depending on their exposure to equity, debt and other asset classes, hybrid funds can be sub-categorised as follows:
1. Conservative Hybrid Fund – Such a scheme is mandated to invest between 10 and 25% of its total assets in equity and equity-related instruments, and the remaining 75-90% in debt instruments. Due to the dominant
allocation towards debt instruments, it is also known as a Debt Hybrid Fund.
The debt portion of the portfolio intends to provide the safety and stability of regular income from coupon payments; whereas the equity portion carries the potential of generating extra income through dividends along with capital appreciation
over some time. A conservative hybrid fund manages its duration actively and can range from short to long duration. The ratings of the bonds may also be mixed and may bear higher credit risk. The stocks in the equity portion may be of
mixed market cap.
Who should invest?
If you do not have the appetite for high risk, with goals to address in the medium term (around 3 to 5 years), wish to hold some exposure to equities, and your returns expectations are moderate, you could
consider a Conservative Hybrid Fund. Investors should look at the portfolio maturity and credit profile along with equity holdings of the scheme to ensure that they invest in the right fund based on their risk appetite and investment objective.
Note that when equities hit turbulence or undergo a correction, the returns may be pulled down; while during the heydays for equities, the returns could accentuate.
[Also Read: New to investing? Here’s how you can formulate your strategy]
2. Aggressive hybrid – An aggressive hybrid fund is mandated to invest 65 - 80% of its total assets in equity and equity-related instruments and the remaining 20- 35% in debt instruments. As the portfolio is skewed
towards equities, which could be across market capitalisations (large-cap, mid-cap and small-cap) and sectors, it carries the name “aggressive hybrid”.
Who should invest?
If you are willing to take slightly higher exposure to equities with relatively higher risk appetite to stomach to interim volatility, and have sufficient time to achieve your goals, then consider
an aggressive hybrid fund. Make sure you have an investment time horizon of medium to long term when investing in aggressive hybrid funds because, when equities hit turbulence or a rough patch, the risk of capital erosion cannot be ignored.
3. Dynamic Asset Allocation Fund or Balanced Advantage Fund – The allocation to equity and debt is managed dynamically by such a fund. There is no restriction on minimum or maximum exposure to either equity or debt.
Strategically, a Dynamic Asset Allocation Fund may go from 100% in equity (across market capitalisations and sectors) to 100% in debt (across maturity profiles and credit rating), depending on where and how the fund management team foresees
the opportunities and threats playing out in the respective asset classes.
That said, each fund in the dynamic asset allocation or balanced advantage fund category is different as most of the funds have a model-driven approach to decide the allocation between equity and debt. The in-house models for each fund is different
as they may take into consideration various parameters like market valuations metrics, momentum metrics or both along with few macro parameters to decide on the asset allocation. Also, the ranges for equity allocation differs from fund to
fund and hence to that extent, the equity allocation may differ from one fund to another. Generally speaking, the idea of a model is to reduce equity exposure when the market valuations are high and increase the equity exposure when the
valuations are cheap while removing some of the human bias. Most of these funds also follow a hedging strategy by taking equity derivative positions when the equity market valuation appears high.
Who should invest?
A Dynamic Asset Allocation Fund or a Balanced Advantage Fund is suitable for investors who want to dynamically manage their asset allocation and want automatic rebalancing of their portfolio as per pre-defined
parameters. As the equity portion may range from 0-100% the investor should be able to stomach any interim volatility while having an investment time horizon over medium to long term.
4. Multi-asset Allocation Fund – Such a scheme invests in at least three asset classes with a minimum allocation of at least 10% in each of the three asset classes. Apart from equity and debt, these funds typically
have exposure to gold or other commodities, etc. Gold is considered a safe haven and an effective portfolio diversifier.
When assessing how much to invest in each asset class, the fund manager looks at a variety of factors and the allocation to these asset classes is regularly reviewed, so it may be dynamic in a sense. By following this approach, a Multi-asset Allocation
Fund to an extent protects the downside risk by investing across asset classes. Remember, not all asset classes move in the same direction at the same rate at all times. Some could do better or worse than the other during certain periods.
Who should invest?
If you are seeking to diversify your portfolio by gaining exposure to a variety of asset classes you may consider multi-asset allocation funds with an investment horizon of over 3 years or so. The main
intention of these funds is to provide investors with returns in the form of capital appreciation in the long run.
5. Equity Savings Fund – This type of hybrid fund is mandated to invest a minimum of 65% in equity and equity-related instruments and a minimum of 10% in debt instruments. To put it simply, an equity savings fund intends
to generate returns by investing in equity, debt and arbitrage opportunities. In this case, the arbitrage strategy is to buy the securities in the cash market and sell in the futures market. Essentially, the fund manager looks to exploit
the pricing inefficiencies in the cash and derivatives segments of the equity market. Thus, the fund's overall equity exposure is partially hedged, reducing its volatility as compared to an aggressive hybrid fund, where the equity exposure
is fully unhedged.
Who should invest?
Given that the portfolio is skewed to equities, both hedged and unhedged positions, the fund could expose its investors to risks related to equities. Ideally, the time horizon to invest in an Equity Savings
Fund should be around 3 to 5 years.
To find a suitable Hybrid Mutual Fund scheme, click here.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision