Balanced Hybrid Funds: A Solution For Tactical Asset Allocation?
Apr 02, 2019

Author: Aditi Murkute

(Image by Mediamodifier from Pixabay)

As India gears up for the upcoming Lok Sabha elections, investors are bracing themselves for any market turbulence. In times of uncertainty, making prudent investment decisions is vital so you don't lose your hard-earned money.

What should you do?

Keep in mind the long term returns on your investment, prudent asset allocation can help you handle volatile markets effectively. Having high exposure to equities could be detrimental. So, it is advisable to maintain a fair balance.

Do you remember the case with balanced funds?

They were assumed to have a 50:50 allocation to equity and debt. But unfortunately, they were not true to their nature and name. Most of these schemes freely varied their exposure to equity, from a minimum 65% to as much as 80%.

The capital market regulator saw this discrepancy and wanted to ensure uniformity and hence clearly defined balanced funds under the hybrid funds category. The objective was to enable investors to make well-informed decisions, by evaluating various schemes on the basis of asset allocation and investment strategy to mark the distinct style.

The capital market regulator recategorised and specified 36 categories of mutual fund schemes in total. It added Balanced Hybrid Fund and an Aggressive Hybrid Equity Fund as a new sub-category of Hybrid fund. Mutual fund houses can offer either an Aggressive Hybrid Fund or a Balanced Hybrid Fund, and not mix the two.

What are Balanced Hybrid Funds?

As per the guidelines, the weight of equity and debt varies from 40% to 60% and no arbitrage would be permitted in the case of a Balanced Hybrid Fund.

Tactically, from an asset allocation standpoint, the portfolio is well-balanced between equity and debt instruments. Clearly, a balanced hybrid fund does not qualify as equity funds. But now they stand true to their name, by keeping a balanced exposure to equity and debt.

Who should consider investing in a balanced hybrid fund?

If you wish to have almost an equal balance to both equity and debt, are a moderate-to-high risk-taker; a balanced hybrid fund would be an appropriate choice, provided your investment time horizon is at least 5 years.

In times of volatility, balanced hybrid funds provide a tactical allocation to equity and debt. When the former turns volatile, the latter would play its role to accomplish the stated investment objective of the scheme.

If you invest intelligently, balanced hybrid funds might help you deal with market volatility. That said before you consider a balance hybrid fund take cognisance of your risk profile, investment objectives, financial goals and the time horizon to accomplish your financial goals. Besides, paying attention to your own asset allocation is important.

Asset allocation is the proportion in which you invest in various asset classes such as debt, equity, gold, and real estate among others. It can be fixed, i.e. remains static irrespective of market conditions, or it can be dynamic, i.e. changes with market conditions.

[Read: Asset Allocation: Hocus-Pocus Or The Essence Of Successful Investing?]

Asset allocation works because the factors driving the prices of each of these assets are different. Basically, equity and debt as asset classes share a negative correlation with the other asset classes. This means they often don't move in the same direction.

Thus, with a tactical asset allocation approach, you could optimize portfolio returns while keeping market risk low and without having to worry about rebalancing between equity and debt.

In Conclusion:

The performance of a Balanced Hybrid Fund/s you choose will be hinged on the way the fund manager handles it - mainly the portfolio construction for equity and debt. As an investor, you need to take a closer look at the portfolio characteristics and the investment strategy the fund/s follows.

Do note that past performance of a mutual fund scheme/s is not indicative of future returns; hence do not base your investment decisions looking merely at returns.

[Read: Why Selection Is Crucial To Make Solid Gains With Mutual Funds]

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