Stick to hybrid funds, capping risk for lower returns may not be a bad idea

If one looks at last year's data, it is interesting to note that the hybrid fund category was doing rather well till January-end

“Regular dividend seekers aren’t very happy with the hybrid fund category after the recent market fall and the government’s decision to tax dividends in the investor’s hands. However, I like this category because it is good for many kinds of investors,” says Hemant Rustagi, chief executive officer, Wiseinvest Advisors. If one looks at last year’s data, it is interesting to note that the hybrid fund category, in which the fund manager invests in equities, debt, and even uses the arbitrage strategy, was doing rather well till January-end. The assets under management (AUMs) peaked at Rs 4.11 trillion — highest in the past year. 

But since February, AUMs started declining and stood at Rs 3.2 trillion in May-end — down over 20 per cent.

This category attracts several kinds of investors. One of the important ones is the monthly dividend seeker, who depends on these schemes for a regular income. And they were hurt badly when fund managers were unable to pay dividends owing to the sharp fall in the markets. 

Then, as Rustagi explains, these investors are the ones who want to enter the stock market, but aren’t sure about the schemes they should invest in. “It is a good category for those who want some exposure to the stock market, but don’t want to go the whole hog initially. Open-end hybrid equity-oriented schemes work for these investors because they get the tax benefit of equities. They can graduate to large- and mid-cap schemes in the future,” adds Rustagi.

Another fund manager points at the third category of investors — those who cannot manage active asset allocation. “For these investors who do not do financial planning in terms of allocation money to equity and debt, and reallocate on a regular basis, these schemes are quite good because it gives them a natural hedge against over-exposure to equities or debt at any point in time. Also, many investors may not want to spend the next 10 years or more in equities for returns, this is a medium-term option for them,” says the fund manager.

 

So, it works both ways — no eye-popping returns during good times, but investors will not be hurt very badly during a bloodbath in the equity markets. So, the pure equity investor in large- or mid-cap, or even the multi-cap fund investor, is staring at 25 per cent-plus category average returns in the last three months, since the market turned around from March lows. Even the most aggressive segment in hybrid funds — the hybrid aggressive category — has returned 21.45 per cent (as of July 6 net asset values). At the same time, over a six-month period, the category average returns for large-cap funds are 9.07 per cent, 

whereas these schemes have fallen only 6.61 per cent. In short, both returns and risks are capped.

Investment experts are divided over these schemes because many believe that it gets difficult to gauge their equity or debt performance. Like financial planner Suresh Sadagopan says: “We usually try to avoid the confusion and invest separately in debt and equities. But if there is a scope for only one scheme, then we opt for these funds.”

However, given that both debt and equity markets will be volatile in the days to come, it would make sense for investors to have one such scheme in their portfolio during these uncertain times. It would serve as a hedge against too much volatility in any particular asset class.