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Are Hybrid Mutual Funds a better option than pure equity schemes in the current stock market scenario?

Equity volatility to continue over the near term given the global risk off environment but Indian equities over the longer term given strong corporate fundamentals looks positive.

hybrid funds, equity, debt, stock market, investors
For retail investors, it may make sense to allocate to hybrid funds, where fund managers could take a call on the amount of equity depending on the market situation.

Currently, the stock market is down from the levels seen about nine months back. To a long-term investor, this could be an opportunity to add or make fresh investments. Buy low, sell at high remains a time-tested principle in the stock market. But, is the time right to buy now or wait for the market to correct further?

When markets are bearish, debt may see a higher allocation in one’s portfolio. Instead of pure equity funds, one may consider investing in Balanced Funds, which are now officially known as hybrid funds. Hybrid funds are those that invest in both equity and debt assets, in varying proportions.

Among the various types of hybrid funds, categories like Balanced Hybrid (BH) category and Aggressive Hybrid (AH) are the popular ones. In the Balanced Hybrid (BH) category equity allocation has to be between 40 percent and 60 percent of total assets while in Aggressive Hybrid equity allocation has to be between 65 percent and 80 percent of total assets and the allocation for debt instruments has to be between 20 percent and 35 percent. “The allocation is driven either by the fund manager’s view of the markets or an algorithm. This product type works well for investors who do not want to actively participate in allocation related decision making or those who lack an understanding of market cycles. It’s also a good option for investors that are new to equity markets.” says Roopali Prabhu, CIO and Co-head of Products & Solutions, Sanctum Wealth

Hybrid funds may not suit all kinds of investors. In fact, retail investors should not try to time the market rather should focus on ‘time in the market’. For those who try to time the market, a quick reversal may keep them waiting to catch the bottom. For the HNIs, following a tactical approach for allocating funds across equity and debt is a much preferred way. “HNIs however tend to be multi-banked and most of their advisors would have a view based allocation. That in itself could veer away from the desired allocation at an aggregated portfolio level. To further invest into asset allocated products could only complicate the overall asset allocation. Therefore, we suggest that HNIs avoid hybrid funds,” says Prabhu.

But, what should long term investors do now – Should they invest in hybrid funds or pure equity funds? “We expect equity volatility to continue over the near term given the global risk off environment but are positive on Indian equities over the longer term given strong corporate fundamentals, correction in valuations and relatively strong macro fundamentals for India. Hence, for retail investors, it may make sense to allocate to hybrid funds, where fund managers could take a call on the amount of equity depending on the market situation. This could allow to tide over the interim volatility. The other option is to stagger investments via SIPs or STPs. For HNI investors there are better options available to manage asset allocation and volatility, and thus can avoid hybrid funds,” informs Prabhu.

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