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A Complete Guide to Hybrid Funds | Incl. Multi Asset, Arbitrage & Balanced Advantage Funds | ETMONEY - YouTube
Channel: ET Money
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hybrid funds comes in all shapes and
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sizes
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there are shapes in the form of fun
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categories like equity savings fund
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balanced advantage fund aggressive
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hybrid fund
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conservative hybrid funds etc and then
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there are sizes
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with funds ranging from 20 allocation to
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equity
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to 80 all this confuses investors
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should you go for aggressive hybrid fund
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or balanced advantage fund
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when to pick equity savings fund what is
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an arbitrage fund all about
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hi my name is renu and in this video
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we will discuss the key hybrid fund
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categories
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and talk about which risk investment
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horizon
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each of them fits in
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the stock markets have moved up by more
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than 50 percent
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since the march 2020 lose and we have
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seen huge retail participation
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in direct equities and in mutual funds
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when it comes to mutual funds the most
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popular investor category
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continues to be the plain vanilla equity
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funds
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however the tried and tested
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recommendation
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for a first-time investor would still
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have to be hybrid funds
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hybrid funds work on the concept of
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asset allocation
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simply speaking these funds invest into
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a combination
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of asset classes like equity debt
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coal and even international etfs this
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allows investors
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to reap the benefit of any upside on
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account of the equity exposure
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and protect the downside by parking some
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portion
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of the surplus into debt instruments as
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well
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the different assets often have negative
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correlation
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which not just help with portfolio
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diversification
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but also improves the risk reward ratio
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here's why asset classes go through
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cycles
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and often a different asset class
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emerges on top of the performance chart
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for instance in 2015 the bse sensex
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that is equities posted a return of
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negative 5
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while debt returned positive 8.7
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then in 2017 censex posted a massive 28
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return while the debt index posted a
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relatively below power return of six
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percent
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negative five percent to positive twenty
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eight percent
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this highs and low cycle often continues
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across asset classes
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almost every year and i've personally
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not seen a year
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where all assets are up or all of them
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are down
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in addition to return and risk
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optimization
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these funds also help investors get a
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first feel of the different asset
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classes
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with the fund management team smartly
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moving money
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across equity gold debt and commodities
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depending upon the evaluation models and
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future outlook
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as an investor you have choices
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in fact you have too many choices with
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seven sub categories
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of hybrid funds which can confuse
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investors
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but don't worry i'm here to help you
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understand
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each of the hybrid fun subcategories
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along with its suitability
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as per your risk profile let's begin
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[Music]
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let's start with the most cautious of
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all hybrid funds
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the conservative hybrid fund the
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conservative hybrid category of funds
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predominantly invest in debt instruments
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the equity allocation for these funds
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can be anywhere between
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10 to 25 while the debt allocation
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ranges from 75 percent to 90 percent
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the conservative hybrid fund's priority
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is safety of capital
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and hence asset participation is skewed
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towards debt instruments
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to build our case we looked at the
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year-on-year performance data
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of the largest conservative hybrid
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mutual funds
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barring one instance most funds offered
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positive returns in most years and while
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their returns
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might not be super spectacular it will
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perform better than fixed income
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instruments
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like fixed deposits these funds are
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suitable
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for risk covers investors whose priority
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is safety of capital but are willing to
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take a small allocation
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into equities which will provide an
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upside potential
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to the overall performance of the fund
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[Music]
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the next category in the hybrid fund
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space is a balanced hybrid fund
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so a balanced hybrid fund means a
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balanced balance fund
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let me explain the balanced hybrid
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category
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invest about 40 to 60 percent of its
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assets and equities
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and the rest in debt which means at any
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point in time
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there can be forty percent allocation to
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equities and sixty percent allocation
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into debt
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or there can be sixty percent allocation
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into equities
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and forty percent into debt or any
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combination in between
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balanced hybrid funds are suitable for
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investors
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with a moderate risk profile that is
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people who don't want
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to begin exposure in a particular asset
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but don't want
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too little exposure as well
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[Music]
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aggressive hybrid funds are one of the
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most popular categories
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in the hybrid space this is evident in
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the assets under management
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under each fund category the aggressive
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hybrid funds
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are the runaway winners with an aem of
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over one lakh row
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while balanced hybrid and conservative
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hybrid funds
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together have just about 25 000 growing
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assets
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the mandate of the aggressive hybrid
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category allows it to predominantly
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invest
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into equity instruments with an equity
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allocation
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of anywhere between 65 to 80 percent of
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the total assets
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this category is ideal for investors
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with an aggressive risk profile
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and whoever time horizon of more than
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five years
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during this lockdown we have seen a good
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chunk of dmat accounts being opened
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and first first-time investors rushing
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to buy shares
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without understanding much of what they
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were up to
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lack of knowledge or discipline is bad
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in investing
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and it won't be uncommon to see these
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same first-time investors panic
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when the current good time starts to
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reverse
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we are of the view that for such
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investors an
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aggressive hybrid fund is a perfect
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alternative
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and should suit young and aggressive
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first-time investors
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the fund itself comes with some
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protection
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so even if the fund takes an exposure of
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eighty percent into equities
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the rest twenty percent in debt or
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liquid instruments
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will act as a cushion if the stock
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markets were to get into a volatile
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phase
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[Music]
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the dynamic asset allocation or balanced
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advantage category
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has been gaining popularity among
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investors on account of its flexibility
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to move across asset classes with no
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limits fixed by the regulator
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the allocation between equity and debt
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is dynamically managed
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it's managed because you get the
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services of a fund management team
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that adds a flexibility layer and moves
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money across the different asset classes
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it is dynamic because the allocation
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itself
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depends on validation models used by
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them
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these funds normally allocate more to
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equities
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when valuations are cheap and less to
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equities
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when the valuations are expensive for
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instance
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icsa prudential balanced advantage funds
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net equity allocation for most of 2019
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was it 51 as the markets were generally
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on the expensive side but when the stock
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markets
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tanked in march 2020 the fund management
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team at icsa prudential mutual fund
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allocated motor equities and increased
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the share of equities
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from 51 percent to 73 percent this
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is how these dynamic asset allocation
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funds work
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buy low and sell high the fund also uses
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derivative strategies for hedging or
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portfolio rebalancing
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okay i've used some big words here but
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what it really means is that
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the fund deploys techniques to control
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risk
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so that it can help investors make above
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average returns
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and below average risk the fund category
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is most suitable for investors who wish
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to participate
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in the market but are not comfortable
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with volatility
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as we see in the table featuring the
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largest funds in this category
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the performance of these funds is mostly
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consistent
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although they won't give superior
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returns
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in fact these funds are constructed for
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stability
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rather than volatility with inbuilt
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exposure
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into arbitrage opportunities and the
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debt component
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that are aimed at ensuring return of
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capital
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rather than return on capital you want
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stability in returns
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then dynamic asset allocation funds will
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work for you
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and that's why we believe that these
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funds are suitable
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for first-time investors and even
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conservative to balanced investors
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the next category in the hybrid space is
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the multi-asset allocation funds
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multi-asset allocation funds can invest
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into at least three asset classes
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with a minimum allocation of 10 into
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each asset class
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and what are these asset classes there
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is of course
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equity and debt but then there is also
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commodities
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where assets are invested into there is
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gold and there is international exposure
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as well
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all in a single fund in this highly
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diversified fund category
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the fund manager will move across the
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asset classes
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depending on the market outlook and the
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valuations
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at which the asset is available there is
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considerable downside support as well
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because different assets tend to be
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negatively correlated
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this is best illustrated when we compare
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equities in gold
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we see how the nifty index and the gold
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etf
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are moving in opposite directions almost
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making a mirror image of
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each other this shows negative
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correlation
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and acts as a fail-safe against massive
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spikes or downturns
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the multi-asset allocation fund is idle
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for investors
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who understand the advantages and
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disadvantages of the different asset
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classes
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and are keen to grow their wealth with
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stability and diversification
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[Music]
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the next category in the hybrid fund
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space is the arbitrage funds
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arbitrage means riskless profits
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well unfortunately there is nothing
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called restless in the world of
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investments
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and perhaps it's the name that gives
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beginner investors
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a different impression on these kind of
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funds
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the arbitrage funds are designed to
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generate returns
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from the mispricing opportunities these
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can happen in many ways
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for instance say a stock is available at
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150 rupees in nsc
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and at 151 rupees in bse this means
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if i buy the stock at nsc and instantly
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sell it at bse
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i would have made a one rupees profit
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this is one way
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another way is a cash in futures market
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cash market refers to the current price
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of a security
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and futures are the anticipated price
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for a later time
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arbitrage funds earn returns for
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investors
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from the difference in pricing of stocks
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between the cash market
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and the futures market so if the stock
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is expected to go high
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the fund manager will buy from the cash
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market
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and simultaneously sell in the futures
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market and vice versa
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these trades can be positive or negative
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but generally arbitrage funds
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tend to give stable returns a few years
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back
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arbitrage funds used to deliver upwards
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of eight to nine percent annual returns
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but lately these have tempered down to
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mid six percent
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2020 has been particularly harsh on
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arbitrage funds
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with most schemes achieving only three
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person returns
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arbitrage funds can be used to park
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short-term surplus
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but over a period of six months to a
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year
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the good part is that these funds are
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subject to equity taxation
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and have the potential to generate
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higher returns
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than liquid plus funds
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[Music]
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the equity savings funds invest into
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equities
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equity arbitrage and debt this is done
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to keep the minimum investment in
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equities
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at least at 65 percent as it will give
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favorable equity taxation
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the equity savings fund also has a
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minimum allocation of 10 percent in debt
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which allows for some downside
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protection along with the arbitrage
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component
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from a returns perspective the fund
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tends to perform
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somewhere between a balanced hybrid and
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an aggressive hybrid
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due to the higher equity component in
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these funds
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this fund is most suitable for moderate
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investors
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who want to have some downside
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protection but are generally fine with
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taking a decent exposure into equities
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we would recommend this category of
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funds to investors
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who want a debt plus returns and have a
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three-year time horizon
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all right let's recap what we learned
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firstly
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we described seven different types of
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hybrid funds
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secondly we understood the construct and
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composition
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of each of these thirdly we looked at
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some data
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comparisons and performance information
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and finally
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we looked at the suitability of each of
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these hybrid fund categories
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to the different risk profiles our
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suggestion would be that
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you should look at the different
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categories of hybrid funds on the basis
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of your risk profile
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i say so because these funds have equity
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exposure
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which adds an element of variability
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plus the fund managers
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move across assets and market
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capitalizations
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even in debt there are calls taken on
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the basis of interest rate moments
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and the credit environment so net net
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hybrid funds
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do an excellent job and a balancing act
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and are an excellent addition to have in
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your mutual fund portfolio
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especially if you're new to investing or
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generally
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are conservative or moderate in your
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wrist outlook
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i hope you liked our video and exploring
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subscribing to the et money channel
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for timely video updates if there are
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any questions
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on this video content then feel free to
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type them in the comments box below
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i look forward to answering them until
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then take care and happy investing to
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you
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mutual fund investments are subject to
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market risks
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read all scheme related documents
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carefully
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