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Seeking upside but worried about the downside?

Seeking upside but worried about the downside?

14 Oct 2021

Mumbai: Investors, who believe the risk-reward to go all out into equities is not favourable after the recent run-up could consider hybrid mutual funds. Financial planners are suggesting Equity Savings Funds and Balanced Advantage Funds to investors wanting to participate in the equity rally but looking to reduce risks at the same time.

Both these fund categories allocate a portion to equity, equity-related strategies and bonds. The direction neutral trading strategies and the bond exposure cut the volatility, while the equity holdings boost returns.

“Traditional investors are allocating money to hybrid funds as they are wary of the risk associated with equities,” said DP Singh, chief business officer, SBI Mutual Fund.

Balanced advantage funds dynamically manage equity allocation in the scheme based on market valuations and can allocate between 30% and 80% to equities. Those following a countercyclical approach currently have 25-50% allocation to equity, as valuations are stretched.


With the Nifty past the 18,000 mark, fund managers believe valuations are at a premium to long-term averages. The Nifty50’s price-to-earnings (PE) Ratio – a popular valuation measure – which stood at 17.15 times on March 23, 2020, has risen to 27.49 times now. The price-to-book value (PB) has surged from 2.17 times to 4.51 in this period.

Financial planners believe investors could allocate fresh or incremental money through hybrid funds that have a lower equity allocation than plain vanilla equity funds.

“Investors who want exposure to equity but are worried about volatility and unsure of market direction in the near term could opt for balanced advantage fund,” says S Shankar, CFP, Credo Capital. Shankar recommends ICICI Prudential Balanced Advantage Fund and IDFC Balanced Advantage Fund.

Investors with a lower risk appetite could look at equity savings funds, considered even safer than balanced advantage funds. Fund houses have informally labelled it as a product for entry-level investors, who have money predominantly in fixed deposits.

“Equity savings schemes that allocate between 20% and 40% to stocks are a good starting point for those looking for slightly higher returns than fixed deposits with an 18-month time frame,” said Radhika Gupta, CEO, Edelweiss Mutual Fund. She believes investors could also switch from this category to a pure equity fund in case of a sharp correction in the markets.

Equity savings funds invest 20-50% of their portfolios in equity, 15-45% in arbitrage and the balance in fixed income. This allows the category to be treated as an equity product for taxation.

“Investors should opt for funds that have 20-30% allocation to equity and the debt component should have lower maturity,” said Rupesh Bhansali, head-distribution, GEPL Capital. His top pick is Mirae Asset Equity Savings Fund. Financial planners also recommend equity savings funds managed by Kotak MF and ICICI Prudential Mutual Fund.