Do you need a hybrid fund? Why not use 12-20-80?

Eating or investing is not enough - a balanced diet for your body and a sensible investment plan for your finances, designed to fit your specific needs, is what you should aim for!

The data is encouraging. Systematic Investment Plans and investments by individuals in mutual funds continues despite:

1. Higher expenses for our daily needs - which means many of us have lower savings to invest,

2. Uncertainty of jobs and future salaries given the fears of a global slowdown - particularly the impact on those working in dream IT jobs with or without moonlighting possibilities,

3. The sharp and sudden surges and declines in stock markets and the NAV of mutual funds which require many to fasten our their seat belts on this bumpy ride!

Given these many variables, the continued flow of SIP into equity mutual fuinds is, indeed, a big win and - in my opinion - investors like you are doing the right thing by continuing to invest in a steady, planned manner via the easy-to-use SIP. But the key question is: are you investing in a correct mix of underlying mutual funds?

Are you drifting - or in control?

Many of us drift and flow with the tide. We are told by our family, our neighbours, and our friendly contact in our bank to 'invest in mutual funds'. That is good advice. As the AMFI saying goes "mutual fund sahi hai".

The AMFI message is spot on: For most investors, mutual funds are the best medium with which to create long- term wealth. Investing your savings in mutual funds to allow your money to work for you while you may still be working (or a lucky few are settled in retirement) is a time-tested winning idea. But it is incomplete advice. It is a bit like being told by the ever-watchful mother or aunt, "beta, tum patley ho gaye - tumko jyaada khaana lena khana chahiye". Yes, eating more food is probably a good idea for many given our stressful and busy lives but there is "bad" food and "good" food. Similarly, the act of investing is good, but you should know how to invest and where to invest.

There are over 90 million folios invested in equity mutual funds. Though the number of unique investors may be smaller, is it possible that tens of millions of investors have been given a wrong diet of mutual funds and they are investing in mutual funds that may not suit their purpose?

The background to this doubt lies in a fundamental fact: intermediaries earn more commission on selling you a Regular Plan of an equity mutual fund than a gold fund or a liquid fund. Commissions to intermediaries on equity mutual funds tend to be 1% of the money they make you invest - this is 10x the commission paid to the intermediaries were you to invest that same amount of money in a liquid funds. Similarly, within equity mutual funds there are two broad categories: those that are

1. "active" and charge a higher expense ratio (because the fund managers and research analysts have to travel across the country to meet the best companies to build a portfolio for the mutual fund), and

2. the "passive" funds that track the popular indices such as NSE-50 or BSE-30 Index, which need nothing more than a programme on a laptop to mirror the Index.

The "actively" managed funds charge higher expense ratios to investors and, therefore, can pay more commissions to intermediaries who help them gather investments from investors like you. The expense ratios of the passive funds tend to be 1/5th of the active funds and, hence, they pay a lower commission to intermediaries for the investments they bring in.

It is important to know that a monetary reward to an intermediary is not the same for every product or mutual fund placed in front of you; and, hence, every investor must ensure that what you they need, . the The basket of mutual funds you need, is what you eventually invest in.

There are times when the label of the mutual fund is misleading. There have been so many hybrid funds and balanced funds that have been launched, which are anything but balanced! They are equity funds in disguise and give investors a false sense of security. If you have invested in a balanced fund you can see how it behaved during a market collapse: say from Feb 1st 2020 till March 31st 2020 when COVID erupted; or from December 31 2021 till June 2022 when the US central bank, the Fed, decided to start increasing interest rates. Chances are it behaved similar to the stock market index - in which case you should be buying an equity fund where the label better explains the risk-return reward that you are placing your savings into.

Should investing really be that difficult and complicated? Should mis-labelling or commission-incentives be a risk that you have to live with as you build a portfolio of equity, gold and liquid funds to give you a combination of potential for return and safety of capital? The answer is a resounding "No!".

Design your own 'hybrid portfolio' with the unique 12-20-80 solution.

As the founder of Quantum Advisors, the Sponsor of Quantum Mutual Fund, I know we started on a difficult journey that had one mission: offer simple solutions at transparent costs to sensible, long-term investors. Over the years, as the QuantumAMC website states very clearly, "Quantum Mutual Fund has methodically nurtured the building blocks of the 3 basic materials required to build a solid home for your financial savings. With a few clicks, find the correct mix of stability, growth and protection needed for your investment portfolio".

Those 3 basic materials are:

1. Quantum Liquid Fund with the focus on safety and low returns (does money under your mattress earn you any interest?),

2. Quantum Gold Savings Fund, with its inherent ability to appreciate and act as a buffer when there are tectonic shifts in the global financial markets,

3. A troika of 3 Equity Funds which actually give you an exposure to 10 to 12 equity funds and sprinkle your invested capital across more than 200 listed stocks that cover the spectrum of large cap, mid cap, and small cap. The Quantum Long Term Value Fund and the Quantum India ESG Fund are both managed by the Quantum AMC team: they select the underlying stocks in the portfolios. The unique Quantum Equity Fund of Funds scans the over 300 equity mutual funds that exist and, with the help of inputs and research from PersonalFN, the Quantum AMC team picks the 8 to 10 equity mutual funds from the hundreds of mutual funds managed by other fund houses. That is right, we get the investment flows from you and fan it to the other fund managers with other AMCs. We take away the challenge and headache which you would have to face - distracting you from your job and work - and Quantum Mutual Fund selects the underlying funds to give you a diversified portfolio.

Easy steps to a tailor-made portfolio for your needs.

The ability to decide how you want to break up your monthly SIP or one-time investment in the simple 12-20-80 engine is revolutionary and easy to use. There are 6 questions you are asked - and no hocus pocus mumbo jumbo of evaluating your "risk-level".

1. Would you like to invest in a basket of "Active" funds or "Passive" funds? (Do you recall the point above with reference to commissions and costs?);

2. How much would you like to invest?

3. How much is your monthly expenditure?

4. How many months of expenses would you like to keep aside as safe money or emergency money? There is a default answer of 12 months - but you can choose your own number! The best way to answer this question is to look back at COVID in March 2020 when we were all locked in at home. How much money would you like to have had in your control within 48 hours to feel comfortable and safe? To maintain your lifestyle and expenses? To keep the money equation out of the way and focusing focus on the health and family fallout from COVID?

5. The balance money - after the safety of "12" or any number of months you choose - is split:

   • 20% in gold, you can change this

   • 80% in equity mutual funds, you can change this.

There is a suggested portfolio, and you can change it whenever you wish and tailor-make it to suit your changing needs.

So, yes, stay invested with:

• the SIPs, or

• your one-time investment with further top-up investments

but don't forget to ensure that you invest in products that are relevant to you and work for you!

How the 12-20-80 solution allowed me to create my own 'hybrid fund portfolio'

As a disclosure and founder of Quantum Advisors / Quantum Mutual Fund, I follow what I preach. For my portfolio, I have adopted a balanced path of investing in equity mutual funds for long term returns, while ensuring I have built a safety belt to ride out the sudden twists and turns of life. Bad news and shaky markets can come hurtling at you unexpectedly from any direction.

Enjoy the freedom to choose your path forward by using the easy-to-use calculator 12 20 80 (baaraa, bees, aur assi). Remember, its not just the answer to "How many mutual funds should I invest in?" that you need to focus on - but the correct mix of mutual funds based on your needs and your objectives.

This table below approximates my holdings and planned investments as of September 2022.

Ajit Dayal is the Founder of the Quantum Group which includes Quantum Mutual Fund and PersonalFn. Ajit has over 35 years of research and investment experience. An avid writer and speaker, Ajit has been profiled and interviewed by many international and local newspapers, magazines, TV channels and radio shows and is never shy of speaking The Honest Truth. Sign up here to get The Honest Truth delivered every week into your mailbox. It will change the way you think about your investments.