Why Investing In Hybrid Assets Makes Sense In Current Markets

Indian equity markets have been under pressure for the past six months due to a host of factors playing out. FPIs have sold close to Rs 3.4 trillion from October 2023 till now (March 24, 2024) in the equity cash segment. India’s GDP growth is expected to be a relatively modest 6.7 Per cent in FY26 according to the RBI, down from the heyday of 7-8 Per cent growth in the previous years. Corporate earnings have been underwhelming over the past 2-3 quarters in a row. Valuation multiples of mid and small caps continue to remain elevated despite a 25 Per cent correction in those indices.[EasyDNNnews:PaidContentStart]

But the market has rallied over the past couple of weeks and FPIs have been net buyers after a long time. The rupee, which slid below 87 levels earlier in March, has risen to 85.6 against the dollar. At another level, the new regime in the U.S. will start its reciprocal tariff plan from April. These tariff wars may result in slowing the global economy. Gold as a commodity has been thriving in this uncertain environment to deliver healthy returns. Though there has been a rally in recent weeks, local and global factors may continue to keep markets volatile.

For investors, it is thus important to shield the portfolio from excessive volatility and drawdowns and generate optimal riskadjusted returns. The best way for them to go about the task is to invest in Hybrid Funds in the current environment.

Hybrid Assets For A Healthy Portfolio
There are hybrid funds of distinct categories and for varied investor requirements – conservative hybrid, aggressive hybrid, balanced hybrid, balanced advantage/dynamic asset allocation, equity savings, arbitrage and multi-asset allocation.

Multiple Categories ― Hybrid funds come in six different varieties depending on the mix of two or more of different asset classes: equities, bonds, commodities, REITs/InvITs and derivatives. These funds cater to investors with any of conservative, aggressive or moderate risk appetites.

Rules-driven Investment ― Depending on the category of hybrid fund chosen, the fund manager shuffles among stocks, bonds and other asset classes depending on the market conditions, with the help of rigorous internal valuation and other models.

Risk Management Remains At The Core Of Hybrid Funds. Easier Market Entry ― During falling markets, investors often hesitate to make fresh investments fearing drawdowns. New investors remain reluctant to even enter the markets. However, as fund managers decide on the best asset allocation mix based on prevailing market conditions, investors can confidently park their money in specific hybrid funds based on their goals and risk appetite.

SIPs and Lump-sums Work ― Since risks are contained and a suitable asset allocation pattern is decided, investors can consider SIPs or even lump sums in hybrid funds.

Systematic Withdrawal Post-retirement ― For generating inflation-beating returns over the long term, even retirees need some level of equity exposure. But they must not take too much risk with their retirement corpus. So, some lump sums can be considered, for example in balanced funds, for systematic withdrawals.

Risk-adjusted returns
Over the medium to long term, hybrid funds can generate returns that comfortably beat inflation. And these returns are made by reducing risk levels in the investments.

The choice of the hybrid category depends on how much equity an investor is comfortable with in the overall portfolio.

It is clear from the above table that the key advantage that hybrid funds enjoy is the ability to protect the downsides during volatile and correcting markets.

Because they invest in a mix of assets, a fall in one asset class is compensated by the outperformance in another. The idea is not to maximise returns but to optimise risks.

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