Experts urge investors to choose hybrid funds in turbulent market

Synopsis

Amidst geopolitical uncertainty and market volatility, financial planners recommend cautious investors opt for hybrid funds. These schemes blend equity for growth and debt for stability, managing volatility and providing a smoother investment journey. Hybrid funds offer automatic asset allocation, ensuring disciplined portfolio management without investor intervention.

Given the geopolitical uncertainties and the resulting market volatility, financial planners are advising investors to be cautious and opt for hybrid schemes that combine equity and debt, rather than going all out on any single asset class.

WHY SHOULD INVESTORS USE SCHEMES THAT MIX EQUITY AND DEBT?

Schemes that allocate to both equity and debt help manage volatility and investor behaviour better. By blending equity for growth and debt for stability, these funds aim to provide a smoother investment journey. When stock markets decline, equity-only funds can lose 10–30% of their value in a short period. Debt instruments, however, are generally more stable and generate regular income. A scheme that combines both asset classes can significantly reduce the overall drawdown in an investor’s portfolio during a bear market.

WHAT ARE THE DIFFERENT CATEGORIES OF HYBRID FUNDS THAT COMBINE EQUITY AND DEBT?

There are several categories of hybrid funds that investors can choose from based on their risk appetite:

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a) Aggressive Hybrid Funds: These schemes allocate 65% to 80% of their portfolio to equity, with the balance invested in debt and money market instruments. The fixed income allocation is typically around 20–35%.

b) Balanced Advantage or Dynamic Asset Allocation Funds: These schemes use proprietary valuation models to determine equity allocation. They invest in a mix of equity and debt based on market valuations and conditions, following a predefined investment model. Typically, they increase equity exposure when markets are down and reduce it when markets are elevated. They may hold up to 35% in debt, along with some allocation to arbitrage, with the remainder in equity.

c) Equity Savings Funds: These invest in equity, debt and arbitrage opportunities in both cash and derivatives segments of the equity market. The combined equity and arbitrage exposure typically constitutes at least 65% of the portfolio, while the unhedged equity portion is conservatively managed and usually ranges between 20% and 35%.

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HOW ARE HYBRID FUNDS TREATED FROM A TAX PERSPECTIVE?

Most hybrid fund categories mentioned above are treated as equity funds for taxation purposes. This means that if held for less than one year, gains are taxed as short-term capital gains at 20%. If held for more than one year, gains are taxed as long-term capital gains at 12.5%. A key advantage, especially for high networth individuals, is that even though a portion of the portfolio is allocated to fixed income, the overall taxation remains aligned with equity.

WHAT IS THE BIGGEST ADVANTAGE OF SUCH FUNDS?

Many investors struggle with disciplined asset allocation or lack access to professional financial advice. Hybrid funds address this by offering automatic asset allocation. As the value of either equity or debt in the portfolio rises, fund managers rebalance by trimming the outperforming asset class and reallocating to the other. This ensures disciplined portfolio management without requiring active intervention from the investor

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