Hybrid Funds: An Ideal Way To Begin Investing

Confused about asset allocation? Hybrid funds can help you. Hemant Rustagi tells you how.

KEY POINTS:

• Asset allocation helps in maintaining the right balance between risk and reward, and there is certainly a need for all investors to follow this strategy. Hybrid funds provide investors with an easy way to invest money in a pre-decided asset mix.

• Since hybrid funds have a cap on the exposure to different asset classes, investors need not worry about rebalancing their portfolio from time to time.

• Periodic rebalancing of different asset classes by fund managers is also quite tax efficient, as the investor would not be liable to pay capital gain taxes.

• The major drawback of hybrid funds is that you have to entrust the entire money to a single or a couple of fund houses. Besides, you may not benefit from different investment strategies and philosophies like you would in the case of funds invested in a single asset class.

Investing one’s hard-earned money involves a few important steps like having an investment plan in place, working out the right asset allocation and choosing the right investment option in terms of transparency, flexibility, tax benefits as well as the ability to achieve investment goals over a defined time horizon.

While we work very hard to earn money, not many of us display the same zeal and consistency in investing it. It is quite baffling to see even the most careful and diligent individuals making haphazard investment decisions, and thereby putting their financial future at risk. Besides, certain misconceptions about investment options as well as investment strategies make the entire process quite complicated. No wonder, even a wonderful investment vehicle like mutual funds, which has benefited investors the world over, has failed to take-off in a big way in our country.

It is important for investors to realise that they must follow the right investment strategies and choose the right investment options in order to achieve investment success. This can help them realise their dreams and secure the financial future of their near and dear ones. If you are determined to get the best out of your investments, here is what you need to do.

The focus has to be on deciding an appropriate asset allocation. Apart from ensuring diversification in the portfolio, this helps in determining the kind of risk that you are likely to take and the kind of returns you can expect from your portfolio. Unfortunately, not many investors follow the asset allocation norms. While there are investors who do not really understand the need to follow an asset allocation process, and on the other, many others find this process a little cumbersome.

Considering that asset allocation helps in maintaining the right balance between risk and reward, there is certainly a need for all investors to follow this strategy. If you are not able to decide the right asset allocation for yourself, investing in hybrid funds can be a good way to begin the investment process. There are a variety of hybrid funds on offer from mutual fund houses, and you can benefit from them in many ways.

First, hybrid funds provide you with an easy way to invest money in a pre-decided asset mix. For example, if you wish to restrict the exposure to equities in between 10-25 per cent, debt-oriented hybrid funds like Monthly Income Plans (MIPs) can be a good option. If you are comfortable with higher exposure to equities, equity-oriented hybrid funds would be the right option. If you wish to invest a part of your money in hybrid funds that offer the flexibility of making changes in the asset allocation depending upon market conditions, there are asset allocation funds that you can choose from.

Secondly, since these funds have a cap on the exposure to different asset classes, you need not worry about rebalancing your portfolio from time to time. Third, this periodic rebalancing of different asset classes by the fund managers is also quite tax efficient, as you would not be liable to pay capital gain taxes.

Of course, there is the flip side too. The major drawback of hybrid funds is that you have to entrust the entire money to a single or a couple of fund houses. Considering that some of the fund houses may not have the required expertise to manage both equity and debt portfolios efficiently, the returns can suffer. Hence, you need to be a little careful while selecting the funds and the fund houses.

Also, hybrid funds are limited by the fact that you may not benefit from different investment strategies and philosophies like you would in the case of funds invested in a single asset class. For example, for an individual who is comfortable investing in pure equity funds, there are a number of options like well-diversified Large-Cap funds, Mid-Cap funds, Multi-Cap funds, opportunities funds, value funds, thematic funds and sector funds.

However, the benefits of investing in hybrid funds outweigh the negatives, especially if you are not that experienced and do not have the wherewithal to manage your portfolio actively. Over time, you can include other funds in the portfolio and expand your investment horizon.

Hemant Rustagi
CEO, Wiseinvest Advisors