Markets have been quite volatile in recent times, but instead of seeing it as adversity, volatility deserves to be seen as investor’s best friend. While investors tend to stay cautious in the market during such volatile times, they must appreciate that such market corrections also give them an opportunity to invest at better valuations.
Studies for a long time have been highlighting the importance of asset allocation for long-term portfolio performance. While different asset classes tend to pass through their respective economic cycles, no asset class has been a winner consistently.
Usually, the equity market tends to perform well in an expansionary economy, while debt market tends to perform well in a contracting economy. As such, having a mix of both equity as well as debt can help mitigate the investment risk to a large extent and can help sustain during volatile times.
Thus, investors can consider investing in hybrid funds to diversify their portfolio through a single fund.
Hybrid funds refer to that specific category of mutual funds that enjoy the flexibility of allocating their portfolio into equity and debt. As such, hybrid funds can help investors strike the right balance of both the asset classes – equity for long-term wealth creation and debt for stable and consistent returns.
A hybrid fund, therefore, allows investors to lower their investment risk, while also letting a lower proportion of the portfolio exposed to deep market corrections. It helps the portfolio bounce back from lower levels at a much faster pace.
An analysis of the performance of the benchmark indices from the period before the global recession substantiates the utility of hybrid investment strategy. If you had invested in January 2008, the relative performance of hybrid funds (represented by CRISIL Hybrid 75:25 Index) has been better than S&P BSE Sensex and CRISIL 10-year G-Sec Index, as illustrated by the graphic below:
Hybrid Funds survived the recession better than equity and debt
Source: S&P BSE Sensex (representing equity), CRISIL 10-year G-Sec Index (representing debt) and CRISIL Hybrid 75:25 Index (representing hybrid funds)
Hybrid funds tend to adopt a multi-cap strategy while considering their equity investments, instead of staying biased towards any specific sub-segment. As such, the fund is flexible to invest in all investment opportunities that come along the investment journey. The debt portfolio is constructed after proper research and a threshold of certain credit rating, generally AA and above.
Mutual funds, as an investment option, also provide the facility to invest on a periodical basis through Systematic Investment Plans (SIPs). While the markets may be going up or down, the investments continue to happen automatically on pre-specified dates.
As such, the cost of investments gets averaged over time, thereby eliminating the timing bias from the investments. An aggressive hybrid fund, as an investment strategy, holds 65-80% of their portfolio in equities and, thus, qualifies to be categorised as an equity-oriented fund. As such, the investors can avail the special rates of tax on gains from such funds.
While short-term capital gains (with an investment period of less than 12 months) are taxed at 15 per cent, long-term capital gains (with an investment period of 12 months or more) are taxed at 10 per cent without any indexation benefit. However, long-term capital gains from equities and equity-oriented funds are also exempt up to Rs 1 lakh a year.
Given that the market is expected to remain volatile moving through the general elections, it is not the time to stay away from the market, but instead, make the most of such times by staying invested and continuing to invest in the market. It is time to accept volatility as the new normal and divert the volatility to our benefit with a wide range of hybrid funds suiting varied risk appetites, financials goals and investment horizons.
Author: Raghav Iyenagar, CEO, Indiabulls AMC