Zap Away Market Volatility With Hybrid Funds

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Zap Away Market Volatility With Hybrid Funds
Abhinav Mehta Director, Capital Baazaar
OLM Desk - 03 January 2022

Abhinav Mehta, Director, Capital Baazaar

When the equity market is going up, having an all-equity or a majority-equity portfolio can be thrilling. In contrast, when the equity market becomes volatile or starts falling, then such a portfolio can give you sleepless nights and become the source of all your woes. Let’s see if the alternative is any better. Imagine you had an all-debt or majority-debt portfolio. During volatile or falling markets, you would be happy about all the losses that you avoided. However, when markets are moving up, you would lament missing out on big gains. In either situation, it would seem like a ‘heads you win and tails I lose’ kind of situation.

Strike A Balance

It is often said that too much of a good thing can be bad. So, instead of having an all-equity or all-debt portfolio, wouldn’t it be better to have a portfolio that has both equity and debt investments? It surely will be. Optimally harnessing the value of each asset class and dealing with market volatility can be challenging. There are several reasons for this:

Arrive at the ideal allocation to each asset class. Just having a mix of equity and debt investments is not sufficient to deal with market volatility. The amount allocated to each asset class will determine how well you can weather the ups and downs of the equity market.

The equity market is shape shifting and volatile by nature. This means that in order to take advantage of positive market movements, you must know when to increase exposure to equities. Similarly, to protect your portfolio from a fall in equity prices, you must know when to decrease exposure to equities.

We are all emotional beings and tend to be highly influenced by both our emotions and biases. In the equity market, where prices are constantly changing, these emotions and biases can get heightened and impact your ability to make astute investment decisions.

An ideal solution could be hybrid funds like the Balanced Advantage Fund (BAF) category of funds.

To Weather Market Volatility

BAFs, also called Dynamic Asset Allocation Funds, are a category of hybrid funds that invest in both debt and equity instruments and change their allocation in response to market movements. The exposure to equities can range between 30 per cent and 80 per cent, which gives them flexibility to switch between the two asset classes based on pre-determined investment criteria that are designed to capture market opportunities and limit portfolio downside.  

In this category, different fund houses manage the offering in their own unique style. Some have a model-based approach for asset class allocation. Equity allocation is increased when the markets are cheap and profits are booked as valuations rise, thereby helping rebalance the portfolio. This way, they are able to optimally harness the long-term growth potential of equities and at the same time are able to protect the portfolio from equity market volatility and limit portfolio downside. Additionally, by switching from equity to debt in a timely manner, they are also able to protect the gains made from the equity investments.  

Multi-Asset Funds

In this category, an investor will have access to gold as well along with equity and debt. So, if you are an investor looking for allocation to all the three asset classes, then multi-asset funds is the category to opt for. So, with just one investment you will no longer need to worry about an ideal asset allocation, changing the asset allocation, timing the market, or dealing with your emotional and investment biases.

To conclude, as an investor you can either choose to fear volatility and limit your equity exposure or you can choose to benefit from the long-term growth potential of equities by investing in hybrid funds like BAF and optimally dealing with market volatility.

DISCLAIMER : Views expressed are the author’s own

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