Sujeet is a senior government employee, set to retire in seven years. His children are grown up and will soon start earning. He has been investing in large-cap equity funds. However, he has heard some market commentary about the current equity market valuations being frothy, and this has compelled him to consider slightly less risky products. He is banking on his mutual fund portfolio for his post-retirement financial requirements and cannot afford to take any risk with it. He is thinking of shifting his corpus to a relatively lower risk investment, but is worried he will end up sacrificing higher returns if he moves to a fixed deposit. He wonders if there’s an alternative to the high risk equity mutual funds given current market conditions, that would also provide much-needed growth to his portfolio.
Hybrid funds are mutual fund schemes that typically invest in a combination of equity and debt securities and sometimes in other asset categories such as gold. The aggressive hybrid funds are mandated to invest 65-80% of their assets in equity and the remaining in fixed income. Sujeet could evaluate such funds as markets have been near an all-time high. They fulfil his objective of reducing risk and at the same time participating in equity markets without sacrificing growth in the bargain. To investors, hybrid funds help capitalise from the investment opportunities in the equity markets, provide stability of the debt markets, which could sustain the portfolio in the event equity markets correct in the interim.
The importance of asset allocation cannot be overstated in scenarios where one asset class starts to seem risky. A hybrid fund just offers the same to Sujeet in a ready format. With equity, debt performing well in recent times, these funds have expectedly attracted investor interest. Most hybrid fund categories have set or defined asset allocation patterns. They are good options to evaluate for Sujeet, depending upon his equity (risk) preference. He might also want to consider balanced advantage funds as they are a mid-path solution. He could use the fund to take reasonable equity exposure with the inbuilt mechanism to automatically increase equity allocation if the market corrects. This makes these ideal for conservative investors like Sujeet who are keen on growth from equity investments but are wary of its downside risk.
Conservative investors like Sujeet, who tend to panic during sharp market corrections will certainly find the risk- reward outcomes of hybrid funds more acceptable, compared to pure equity in the scenario where markets seem to have already run up a great deal.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)