By integrating allocations to equities, fixed income and gold in an effort to generate modest capital appreciation, multi-asset funds carry moderate levels of risk
With stock market rising too high and too fast for some investors' liking, the hunt is on for a less risky investment avenue. Meet 32-year old Kapil Singh, who doesn't want to be caught at the peak of markets and is looking for downside protection as well as stability in returns. Financial experts tell DNA Money that hybrid products are best-suited for such investors who are investing now in equity but want to play it safe.
High on breed: In mythology, mermaids are part fish and part female human. Centaurs are part human and part horse. Chimera was usually depicted as a lion, with the head of a goat arising from its back, and a tail that might end with a snake's head. In the investment world of 2017, hybrids exist in form dual-asset funds and multi-asset funds.
"Hybrid schemes may be a good idea for those who are investing now in equity and want to play it safe. Hybrid equity-oriented funds are less risky and may be suitable for those who have a lower risk appetite and cannot stomach too much volatility, which is possible now If the markets correct," says Suresh Sadagopan, founder, Ladder7 Financial Advisories.
For those who have a low-risk appetite and want to participate in equity in a small way, monthly income plans (MIPs) may be a way out. MIPs typically are debt-oriented schemes with 5-25% exposure to equity markets, added Sadagopan. Do remember that there is no monthly guarantee of any income in MIPs.
"Hybrid products can offer varying levels of risk tolerance ranging from conservative to moderate and aggressive," notes Anil Rego, founder, Right Horizons.
Striking a balance: In last one-two years, one hybrid product type has become very popular - balanced funds. Sanjay Parekh, senior fund manager – equity investments, Reliance Mutual Fund, says, "“Balanced funds as the name suggests provides growth in equity and stability in debt. Also, it helps to adequately maneuver the equity levels in the range (say 65-75%), and hence, optimise the risk/return equation." Parekh also believes investors in balanced funds are conservative and it would be ideal to have a dominant portion of equity in large-cap stocks.
Manish Kothari, head of mutual funds, Paisabazaar.com, said, "Cautious investors looking for inflation-beating returns can opt for debt-oriented hybrid funds while others can choose between various sub-categories of equity-oriented hybrid funds— balanced, balanced advantage and equity savings funds — depending on their risk appetite."
As balanced funds invest at least 65% of their portfolio in stocks and the rest in debt instruments, these would suit those with moderate risk appetite. "While balanced advantage funds invest 30–80% of their corpus in stocks, equity savings funds invest 20–40% of their portfolio in stocks," added Kothari.
According to Crisil balanced fund ranking, Reliance Regular Savings Fund-balanced has number one ranking, followed by Aditya Birla Sun Life Balanced 95 Fund, HDFC Balanced Fund and L&T India Prudence Fund are number two while six funds namely Canara Robeco Balance, DSP BlackRock Balanced Fund, HDFC Prudence Fund, ICICI Prudential Balanced Fund, SBI Magnum Balanced Fund and UTI Balanced Fund are ranked three.
Three in one: Multi-asset funds are the ones where investors can take three-in-one exposure (equity, debt, and gold) like Axis Triple Advantage Fund, and Essel 3 in 1 Fund. Addition of gold to a combination of equity and debt is better from risk management point of view.
"As far as the current allocations go, Quantum Multi Asset Fund has been reducing exposure to equities as it keeps moving higher - it has gradually reduced exposure to equities from 45% to 35% now. As far as current allocations go, equities are around 35%, debt around 50% and gold around 15%," says Chirag Mehta, senior fund manager-alternative investments, Quantum MF in an investor document.
By integrating allocations to equities, fixed income and gold in an effort to generate modest capital appreciation, multi-asset funds carry moderate levels of risk.
Despite their higher individual risk, risky assets can combine together in a diversified portfolio and yield the target results for every investor: lower portfolio risk, relatively higher returns. Do remember that multi-asset funds will generate only a few percentage points more than the traditional investment avenues like fixed deposit.
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