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Business News/ Money / Personal Finance/  Why should you choose hybrid funds when markets are unpredictable?

Why should you choose hybrid funds when markets are unpredictable?

By investing across a range of asset classes, hybrid funds reduce the scope of volatility. We explore more on these funds.

Hybrid funds are mutual fund schemes that invest in a mix of different asset classes to diversify the portfolio.Premium
Hybrid funds are mutual fund schemes that invest in a mix of different asset classes to diversify the portfolio.

It is said that one should not put all the eggs in one basket. Because if the basket drops, you will likely lose all the eggs. It is, thus, advisable to carry more than one basket for the eggs. Likewise, you should choose mutual funds that are meant to diversify your investment across asset classes.

Hybrid funds are mutual fund schemes that invest in a mix of different asset classes to diversify the portfolio in a bid to minimise the risk involved. It is a well-known fact that exposure to more than one asset class improves your chances of high returns — particularly in the long run. 

However, there is a difference between doing it on your own, or buying a fund that is entrusted to do it.

When an investor does diversification in a pre-defined ratio, some increase in value of one asset will, more likely than not, disrupt the ratio.

Although it calls for selling the units in one asset class to buy those in the other, the lack of investment discipline of investor could perhaps prevent investors from doing the same. 

On the other hand, an asset management company's (AMC’s) fund managers - being professionals— are adept in keeping their emotions under check and stick to the pre-decided investment strategy (of keeping different asset classes in a particular ratio) to keep the volatility under control.

Impact of volatility on investors

Most investors can't help but worry over volatility in their portfolio. The investment journey especially for new investors could be too nerve-racking for investors. Whenever stock market index rises or declines considerably, the investors tend to get anxious.

Some investors get too carried away with volatility that they either refrain from investing in equity altogether after a massive fall, or go overboard by investing heavily in equity. Both the strategies are wrong for obvious reasons.

“Whenever small investors see too much of volatility, their investment discipline may get hampered – something that you should be careful about," says Deepesh Raghaw, Founder of Personal Finance Plan.

So, the conventional wisdom in personal finance says that equity investment is meant for long term investors. And sporadic fluctuations should not deter the investors.

To counter market volatility, investors can explore one of these hybrid fund categories

I.  Balanced hybrid funds

II. Conservative Hybrid Funds

III. Equity Savings Funds

IV. Multi Asset Allocation Funds

V. Dynamic Asset Allocation fund

Returns of some Hybrid funds (an indicative list)

Hybrid Mutual Fund 1-year return* (in %)3-year return* (in %)
Axis Balanced Advantage Fund12.71   10.73   
Edelweiss Balanced Advantage Fund13.28   17.54
Nippon India Balanced Advantage Fund10.94   12.30
Tata Balanced Advantage Fund12.48   14.88   
Union Balanced Advantage Fund7.7914.15

*Returns are direct as on Feb 28, 2022

(Source: AMFI)

Kunal Valia, Co-CIO, Listed Investments, Waterfield Advisors says the very objective of hybrid funds is to weather the storm better relative to index or equity funds. “Hybrid Funds are designed to adjust allocations to equity and debt based on market conditions and such funds typically fall less in a downturn as their exposure to equity is less compared to index/equity funds. Further such funds during the downturn add to equity and reduce equity exposure in an upswing," says Mr Valia.

Experts point out that whenever you compare two assets, the one with two asset classes will obviously be less volatile than the other. “The same is true for hybrid funds. For small investors, good investment choice is balanced advantage funds or dynamic asset allocation funds. More than the return, it is the funds’ behaviour towards volatility in the market which makes them better than the rest," says Raghaw.

However, he shares a cautionary note by saying that it is the composition of hybrid fund that makes a difference. “If there are two funds: one focussed on large cap stocks, while the other is a hybrid fund with 75 percent of stocks allocated to small cap stocks, then obviously the hybrid fund would be more volatile," says Raghaw.

So, it is imperative that you take a well-informed decision of investing in a hybrid fund that aligns with your investment goals. Moreover, it is important to note that the AMC can temper the effect of volatility in the funds they manage to a certain degree, but it is not feasible to curb it altogether. Do not have too high an expectation.

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Published: 15 Mar 2022, 08:46 AM IST
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