Keep Your Emotions Away with Hybrid Funds

Most investors cannot avoid worrying as they experience volatility or fluctuations in their equity portfolio. Over the last two years, aided by mobile apps that allow easy transacting, millions of new investors have entered equity markets. The emotional journey, especially for these new investors could be too much to handle, resulting in investment mistakes like overinvesting after a sharp rally in markets or completely avoiding equities after seeing erosion in their portfolio value.

In our last week’s edition, we discussed the benefits of SIP to counter equity market fluctuations. Another option that could be considered is Hybrid Funds. There are various types of funds which follow hybrid strategies like:

• Balanced Advantage Funds
• Aggressive Hybrid Funds
• Conservative Hybrid Funds
• Equity Savings Funds
• Multi Asset Funds
• Asset Allocator Fund of Funds

Hybrid Funds for Power-Packed Asset Allocation

As the name suggests, a hybrid fund invests in two or more asset classes. While ‘asset allocation’ is a well-accepted concept by investors across the world, there is a fine distinction between doing it on your own and opting for a hybrid fund. Investing in a hybrid fund has a big advantage as compared to investing separately in different asset classes, for most investors.

For instance, even an investor, who has a diversified portfolio of a few equity funds and debt funds, is susceptible to an emotional journey. There would be times when the equity oriented funds may go down in value, while the debt funds are likely to have gone up in value. For an uninformed investor, this situation may lead him to ‘act’ to exit out of the “laggard”. The best course of action though is not to ‘act’ and hold on to the investments for a long term. The urge to act may actually defeat the purpose of asset allocation, which on a fundamental level is an acknowledgement of the uncertainty in each asset class.

Hybrid Funds reduce emotional decision making

When we make investments, some will always be better than the others. They cannot and should not behave similarly. However, it is normal to get upset with the ones not doing well. It is not easy to train our mind to evaluate our portfolio as a whole. We mentally assume each investment to be different. A temporary loss in equity, which has higher return potential in the long term, may lead us to exit from it, while holding on to lower risk-return products. This is an irrational step or an action that is likely to be against one’s own interest.

Hybrid funds help us in keeping our irrationality at bay. They cushion the impact of market fluctuations, thereby taking us through a more stable investment journey. You could invest in a range of hybrid funds to achieve your desired asset allocation as against investing in separate equity and debt funds. The fall in value could be lesser as compared to pure equity funds, or in cases when the market volatility is not so severe, the hybrid funds may not fall at all.

It is in the human nature to avoid losses. The tendency of loss aversion creates a disappointment in us when we see a loss in a particular investment product. It takes years of investing experience to acquire skills and more importantly, maturity to overcome such irrational behaviour. Thus, hybrid funds as a tool for asset allocation can help better manage the expectations of investors and tide over short term volatilities, while keeping in mind the long term objective of wealth creation.

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