Hybrid Mutual Funds combine various asset classes and allocate on a dynamic basis or vide a static allocation percentage, reducing volatility as compared to pure equity funds. Many a times it is not so much about the point-to-point returns. It is about a stable journey for moderate to low-risk profile investors so that they could continue on the investment track and do not exit.
One of the reasons why investors suffer is because they move out of an asset class completely when they are faced with adverse market conditions. It is quite common to see them selling their equity investments during stock market downturns and moving out of debt during the periods when the stock market does well.
Scheme categories like Balanced Advantage Funds are a type of Hybrid Mutual Funds which can adjust the net equity exposure levels according to the market valuations or macro indicators or both, depending on the asset allocation model each one follows. Investors could look at valuation metrics of forward P/E and compare the same to historical averages to assess the current valuation. India’s market premiums could be compared to other emerging markets’ historical average premiums. During phases of market volatility or at points where valuations have run up, investors can increase exposure to such products.
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“Tactical allocation calls under a dynamic asset allocation structure of hybrid mutual funds by a professional money manager, if and when required, makes cash available from within the portfolio at the right time when not many investors on their own shell our cash towards correcting asset classes. One of the reasons why investors suffer is because they move out of an asset class completely when they are faced with adverse market conditions. It is quite common to see them selling their equity investments during stock market downturns and moving out of debt during the periods when the stock market does well,” says Shaily Gang, Head-Products, Tata Asset Management.
Multi Asset Allocation Funds help maintain the right balance between risk and reward in the long run. Since the money remains invested in different asset classes, investors do not miss out on sudden gains in an asset class. But one misses out when a particular asset class does well for prolonged periods. An individual investor can allocate on his own to an active equity scheme category e.g. midcap and small cap fund, an ETF like Nifty 50 ETF, a bond fund, Gold ETF, etc. However, doing this through a Multi Asset Allocation Fund offers taxation efficiency i.e. rebalancing or changes to the portfolio can happen without taxation impact. Only if the units of the multi asset fund are redeemed, will there be a taxation impact.
“Different things impact asset classes differently and thus diversifying the investments makes sense. Negative correlation between different assets ensures not all investments fail at the same time, giving stability to the portfolio. Asset allocation is a form of diversification that reduces your portfolio risk more than it compromises returns. When you invest in two different asset classes that tend to go in opposite directions in different market conditions, the combination is likely to have a stabilizing effect on your portfolio,” adds Gang.
Debt asset class aims to offer regular income, is less volatile and has low correlation with equities. Gold offers safety when equities underperform and has a low correlation with equities. Equities carry very high risk but have the potential to provide good returns over the long run.