Some events are routine and have lower effects on the returns you earn on your investments. But once in a while, markets face nasty jitters that could potentially affect the returns your investments can generate, not only now but even for a few more years in the future.

Budget, Lok Sabha elections, policy changes at both global and domestic level and geopolitical developments to name a few are such events that send markets into a tailspin.

Just like Board examinations and final year university examinations have even the most brilliant students anxious, these events can potentially upset even the most sensible investor.

And as you know, markets are facing all these events in 2019. Needless to say, they are jittery. Any unexpected outcome on any front will throw Indian markets in a quandary.

When faced with a difficulty, you are often advised to make prudent decisions and maintain a balanced approach.

Will that commonsense advice work for your investments in 2019?

Will hybrid funds help you tackle volatile and tough market conditions?

The answer depends on how you approach them and what do you expect from them.

If you expect them to generate positive returns at a time when equity indices are trading in red and there isn't any encouraging development in the bond markets as well, you're expecting too much.

But if you invest in them intelligently, hybrid funds might help you deal with market volatility effectively.

For those who aren't quite acquainted with this type of mutual fund schemes:

Hybrid funds are funds that invest in two or more asset classes—predominantly equity and debt. Until recently, Hybrid funds were synonymous with equity-oriented Hybrid Funds that invested over 65% of their assets in equity. But after SEBI implemented the Categorization and Rationalization rules for mutual funds, hybrid funds having predominant equity exposure got sub-divided further.

Types of hybrid schemes	Characteristics
Balanced Hybrid	Balanced Hybrid Funds invest 40% to 60% of total assets in equities and 40% to 60% in debt instruments.
Aggressive Hybrid	Aggressive Hybrid Funds invest 65% to 80% of total assets in equities and 20% to 35% in debt instruments.
Dynamic Asset Allocation or Balanced Advantage	The scheme's allocation to equity and debt is managed dynamically.
Multi-asset Allocation	The schemes invest in at least three asset classes with a minimum allocation of atleast 10% each in all three asset classes.

 

Now you must be wondering which type of hybrid scheme suits you the most. You should take a decision based on your personalised asset allocation plan. Your personalised asset allocation takes into account your present financial situation, financial goals, time left in achieving those goals and your risk appetite.

If your equity allocation has gone up significantly over the last 4-5 years, due to sustained rallies in equity markets and your consistent investments through ongoing Systematic Investment Plans (SIPs), you should first try to rebalance your portfolio.

You can do this rebalancing at two levels—at the level of allocation to different asset classes such as equity, fixed income, gold, and real estate and within each asset class too. For example, if your exposure to small and midcap funds is skewed, you might want to redeem a few of them and plough back proceeds in hybrid funds.

Has performance record of hybrid funds been encouraging?

Over the period of five years, aggressive hybrid funds and balanced advantage funds have not only outperformed Crisil Hybrid Aggressive Index but have also managed to beat Nifty50 - Total Return Index (TRI). This is an indication of their superiority in managing volatility.

Performance of hybrid funds…

Category	Absolute (%)	CAGR (%)
	1 Year	2 Years	3 Years	5 Years
Aggressive Hybrid Fund	-3.2	10.0	12.3	14.5
Balanced Advantage	0.7	10.3	13.5	14.6
Dynamic Asset Allocation	2.0	9.6	9.5	12.7
Multi Asset Allocation	0.7	7.3	9.3	9.8
CRISIL Hybrid 35+65 - Aggressive Index	1.5	11.4	12.9	12.8
NIFTY 50 – TRI	2.8	15.3	15.1	12.9
S&P BSE 200 – TRI	-1.3	14.7	15.3	14.5

Data as on January 15, 2019
(Source: ACE MF)

Performance of hybrid funds across market cycles has also been satisfactory. Barring the exception of aggressive hybrid funds, that too only in the present corrective phase, the performance of all other categories of hybrid schemes has been unblemished under bear market phases.

Performance across market cycles…

Category	Bear Phase	Bull Phase	Bear Phase	Bull Phase	Bear Phase	Bull Phase	Corrective Phase
	CAGR	CAGR	CAGR	CAGR	Absolute	CAGR	Absolute
	08/Jan/08 To 09/Mar/09	09/Mar/09 To 05/Nov/10	05/Nov/10 To 20/Dec/11	20/Dec/11 To 03/Mar/15	03/Mar/15 To 25/Feb/16	25/Feb/16 To 23/Jan/18	23/Jan/18 To 15/Jan/19
Aggressive Hybrid Funds	-45.5	60.0	-18.9	25.6	-13.3	26.4	-4.0
Balanced Advantage	-46.1	70.3	-17.6	24.5	-14.5	28.2	-0.3
Dynamic Asset Allocation	-51.1	69.3	-12.8	24.5	-8.0	16.7	1.3
Multi Asset Allocation	-8.0	33.4	-5.5	15.1	-4.5	16.3	0.1
NIFTY 50 - TRI	-53.0	73.6	-24.6	25.3	-21.7	29.2	-0.4

Data as on January 15, 2019
(Source: ACE MF)

Why hybrid funds will have an edge in 2019?

Although the rising fiscal deficit is a real worry, all the other factors that drive bond markets, inflation, credit growth, policy stance, liquidity, etc. remain benign at this juncture. Unless mutual fund houses goof up the credit quality of the portfolio, debt component of the portfolio might remain a lot steady in 2019 as compared to 2018.

Subject to house preferences, most of the responsible and process-driven fund houses might hold only quality (and possibly low beta) stocks under their hybrid offerings. They would ensure that their portfolio is adequately diversified to deal with adverse market conditions.

Now comes the most critical part: Selection of a hybrid fund…

Here is what you need to consider:
 

(Image source: thebluediamondgallery.com)
Quantitative Parameters

1. Performance and risk analysis

This is to analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns. 

Under this, the fund needs to be ranked on quantitative parameters like rolling returns across short-term and long-term periods, such as 1-year, 3-years and 5-years, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

2. Performance across market cycles

You need to ensure that the fund has the ability to perform consistently across multiple market cycles. Therefore, compare the performance of the schemes vis-à-vis their benchmark index across bull phases and bear market phases.

A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters

1. Portfolio Quality

Adequate Diversification - The scheme should not hold a highly concentrated portfolio. The portfolio should be well-diversified and the exposure to the top-10 holdings should be ideally under 50%.

Credit Quality - For debt component, you need to ensure that the fund does not hold a high proportion of low-rated (securities rated AA or below) or unrated debt instruments. A fund with a higher credit quality should be ranked higher.

Low Churn - Engaging in high churning can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.

2. Quality of Fund Management

You also need to consider the fund manager’s experience, his workload, and the consistency of the fund house. Therefore, assess the following criteria:

The fund manager’s work experience – He/she should have a decent experience in investment research and fund management, ideally over a decade.

The number of schemes managed – A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.

The efficiency of the fund house in managing your money – Do your research about the fund house’s consistent performance across schemes. Find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication that their investment processes and risk management techniques are sound and efficient.

Know more about PersonalFN’s research methodology here.

Watch this short video on selecting mutual fund schemes:

Editor’s note:

If you want to add SOLID mutual funds to your portfolio that could help you create wealth in the long run?

But don’t have time and skills to select worthy mutual fund schemes; don’t lose heart. PersonalFN's unbiased premium research service—FundSelect is meant to assist investors in selecting worthy mutual fund schemes.

PersonalFN's FundSelect has 15+ years of an impeccable track record. FundSelect has been based on one simple motto: “Be steady. Be alert. Be winning.”

With FundSelect, you get access to high quality and reliable funds picked by our research team using their comprehensive S.M.A.R.T. score fund selection matrix.

S – Systems and Processes

M – Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

So if you are serious about investing in a rewarding fund, try PersonalFN’s flagship mutual fund research service FundSelect.

Every month, PersonalFN’s FundSelect service will provide you with an insightful and practical guidance on equity funds and debt schemes – the ones to buy, hold, or sell, therefore assisting you in creating the ultimate portfolio that has the potential to top the market. Subscribe to FundSelect today!

Add Comments