Hybrid MFs best bet for long-term investments
when one is probed over their retirement planning or pension needs, they immediately come up with answers like I’m already investing in a pension plan or a Provident Fund (PF/PPF), etc. It’s not wrong or improper to do it but one has to understand how it works or how far is it sufficient for the need.
Most individuals when trying to invest for long term goals like retirement, children education expenses rely on some of the products whose names sound similar to the need. For instance, when one is probed over their retirement planning or pension needs, they immediately come up with answers like I’m already investing in a pension plan or a Provident Fund (PF/PPF), etc. It’s not wrong or improper to do it but one has to understand how it works or how far is it sufficient for the need.
While planning such long term goals, it’s very important for the individuals to make backward calculations to arrive at the amount to invest. This assumes critical in such goals as most of these goals are large and need higher attention. Also, these goals are essential and sometimes the timelines are quiet stringent. For example, the children’s education needs would arrive with the age of the child and can’t be postponed just due to the lack of funds. For that matter even the retirement planning, one mayn't want to extend their retirement from age 60 to 62 because the corpus required hasn’t been achieved. So, however good the product could be but over-reliance on a single product could hurt than benefit.
Hence, it needs an approach of active management over a suit of products or solutions. The biggest hallmark of this approach is the asset allocation. It involves having exposures much beyond the traditional ways of assets like debt, equity or real estate but also into hybrid allocations of debt oriented or equity oriented solutions. So, how to get exposed to such asset classes at a lower expense?
These hybrid products are available in structured debt or equity products which are a little higher end of the investing universe. The required minimum investments and the timelines are large. However, dynamic mutual funds (MF) provide a similar exposure and feel of the larger structures though mayn't be as efficiently but still doing good for the investor. The hybrid MF come in two categories and the tax treatment also varies accordingly. Investor with lower risk appetite could explore the debt oriented hybrid funds where there is a major portion (up to 80 per cent) of the fund compromises of debt instruments like bonds, gilts, etc. while the rest is equity and related instruments which could even include derivatives for better performance and hedge. The taxation is considered alike the debt funds and hence could get the benefit of inflation adjustment over a period of three years and above.
There are also other hybrid products where the execution or the investment style is more sophisticated. These are the dynamic P/E funds. P/E calls for Price Earnings of the equity or stocks. The fund varies the exposure to equity and debt depending upon the P/E levels of the index or a benchmark. So, if the valuations are low or P/E is low the equity exposure in the fund increases and vice-versa.
For investors with moderate to higher risk appetite, the equity oriented hybrid funds does a world of good. They not only offer the better of the equity returns but at a lower risk. This is because while the larger proportion is equity and related instruments, the hedge is provided through the debt exposure in the funds.
The core of approaching these goals is to ensure there is a decent product mix across the asset classes to enhance the returns while limiting the risks. As it’s difficult to always keep tab on all the investments, the alternate is to have a mix of the traditional products along with a mix of these dynamic asset allocation funds to manage and benefit. These funds could also be invested in staggered way of Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP).
(The author is a practising financial planner and could be reached at firstname.lastname@example.org)