Owing to the low cost of capital and liquidity released by central banks in most parts of the world, the Indian markets along with global peers are trading at all-time highs. Let’s understand how hybrid mutual funds can prove to be an investor’s best bet in such adverse market conditions.
Investing at all-time highs
If you look at the data offered by past market performances, you’d find that investors often ignored the concept of asset allocation. An investor is provided an opportunity to invest across asset classes such as debt, equities, hybrid funds, gold, etc. This mistake turned to be quite expensive as investors lost utmost gains in market correction. To avoid such a situation, it is advised to stick to asset allocation strategy at all times. One such way of ensuring that your asset allocation needs are met is by investing in hybrid mutual funds. Hybrid funds, also known as balanced funds, deploy their assets across equity, debt, and other asset classes in a specific ratio based on the objectives of the fund. The equity component in hybrid funds offers growth opportunities to the fund, while the debt component acts as a cushion against high volatilities in the markets.
Why should an investor invest in hybrid funds?
History is proof that one of the key elements for wealth creation can be achieved by adopting proper asset allocation strategy. Adopting the right asset allocation strategy helps to diminish the risk exposure of your fund. Owing to the unique risk-return portfolio of each asset class, an investor can invest across different asset classes based on their risk profile, financial goals, and investment horizon. What’s more, an investor must realise that the co-relation between most asset classes such as gold and equity is negative or minimal. This basically means that two distinct asset classes are not expected to react in the same manner to a certain development. As a hybrid mutual fund portfolio is comprised of different asset classes, the losses arising from one type of asset class can be offset against another type of asset class. This could be widely seen in March 2020 when the equity markets skyrocketed globally due to the spread of the Covid-19 pandemic around the globe. While the equity markets corrected in double digits returns, the gold markets also rallied. Hybrid funds also help an individual to diversify their investment portfolio by allocating their investments to a mix of asset classes. Investing in balanced funds is quite convenient as an investor does not need to invest in different types of mutual funds or asset classes to meet their objectives. A hybrid fund offers a stock and a bond component and sometimes a money market component as well to investors. The stock component allows individuals to earn higher returns on their investments. While the bond component offers the stability against highly volatile assets and acts as a cushion to volatility. As you can see, hybrid funds aim to offer the best of investing world by investing their assets in different types of asset classes.