A 🧵 on Hybrid Mutual Funds.
Understanding different strategies in this category and what to expect and what not to expect from them. And for whom these funds are a right fit?
1/n
Understanding different strategies in this category and what to expect and what not to expect from them. And for whom these funds are a right fit?
1/n
What are different strategies within hybrid category?
1. Aggressive Hybrid Equity Funds
2. Balanced Advantage Fund/ Dynamic Asset Allocation Funds
3. Equity Savings Funds
Aggressive Hybrid Equity Funds invest 65% to 80% in equities and remaining portion is invested in debt.
2/n
1. Aggressive Hybrid Equity Funds
2. Balanced Advantage Fund/ Dynamic Asset Allocation Funds
3. Equity Savings Funds
Aggressive Hybrid Equity Funds invest 65% to 80% in equities and remaining portion is invested in debt.
2/n
Most funds in the category maintain a static allocation into equity and debt.
If you see the category average, 75% is invested into equity and 25% into debt.
This allocation is periodically rebalanced to maintain equity allocation below 80% regulatory limit.
3/n
If you see the category average, 75% is invested into equity and 25% into debt.
This allocation is periodically rebalanced to maintain equity allocation below 80% regulatory limit.
3/n
Balanced Advantage Funds invest 30% to 80% in equities and remaining portfolio is invested in debt.
The uniqueness of this category lies in its dynamic management of equity levels between 30% to 80% (some funds upto 100%)
These funds have in-house models for asset allocation
4/n
The uniqueness of this category lies in its dynamic management of equity levels between 30% to 80% (some funds upto 100%)
These funds have in-house models for asset allocation
4/n
There are different kind of models based on fundamental factors like P/E, P/B and also technical factors like DMAs and volatility.
Some models keep reducing equity levels as market goes up and increase when markets correct, while some models go with the market trend.
5/n
Some models keep reducing equity levels as market goes up and increase when markets correct, while some models go with the market trend.
5/n
Broadly all BAF models try to achieve one common goal, reduce volatility in returns and more importantly, protect downside when markets correct sharply.
The routes are different (using different models) but the destination is common - low volatile equity like returns.
6/n
The routes are different (using different models) but the destination is common - low volatile equity like returns.
6/n
Equity Savings Funds invest 30% - 40% in equities, 25% to 35% in equity arbitrage and remaining 25% to 35% into debt.
The combination of these 3 asset class makes it the most conservative strategy compared to aggressive hybrid funds and BAFs.
7/n
The combination of these 3 asset class makes it the most conservative strategy compared to aggressive hybrid funds and BAFs.
7/n
What to expect from these funds?
One should approach these categories purely on risk basis and not returns alone.
The key objective of these funds are..
Aggressive Hybrid: Equity linked returns with slightly lower volatility over 3 to 5 yrs
8/n
One should approach these categories purely on risk basis and not returns alone.
The key objective of these funds are..
Aggressive Hybrid: Equity linked returns with slightly lower volatility over 3 to 5 yrs
8/n
BAF: Equity linked returns with half the volatility of equity market over 3 to 5 years time horizon and provide significant downside protection.
ESF: +/- 2% over debt market returns with over 3 to 5 years time horizon with slightly higher volatility than pure debt funds.
9/n
ESF: +/- 2% over debt market returns with over 3 to 5 years time horizon with slightly higher volatility than pure debt funds.
9/n
A look at historic performance of all 3 categories gives a fair idea for setting our expectations right.
Risk: See volatility of each category compared to Nifty 50 in the table.
Watch out drawdowns and min returns of each category.
Lastly, look at average returns.
10/n
Risk: See volatility of each category compared to Nifty 50 in the table.
Watch out drawdowns and min returns of each category.
Lastly, look at average returns.
10/n
Aggr Hybrid and BAF have broadly similar return profile, but with significant difference in their volatility.
Aggressive Hybrid Funds have potential to return more when markets are rising, while BAF protects down-side much better when markets fall sharply (-27% vs -19%)
11/n
Aggressive Hybrid Funds have potential to return more when markets are rising, while BAF protects down-side much better when markets fall sharply (-27% vs -19%)
11/n
Equity Savings Fund's risk is lowest when compared to equities, but slight higher than pure debt funds.
ESF's average 3 year rolling returns have been around 7% and max around 9%.
These funds can be good substitute to pure debt funds in a low interest rate environment.
12/n
ESF's average 3 year rolling returns have been around 7% and max around 9%.
These funds can be good substitute to pure debt funds in a low interest rate environment.
12/n
What not to expect from these funds?
Last 1 yr returns of these categories is definitely something one should not expect these funds to deliver consistently.
One should not expect Aggr Hybrid and BAFs to generate higher than market returns, they are not designed to do so.
13/n
Last 1 yr returns of these categories is definitely something one should not expect these funds to deliver consistently.
One should not expect Aggr Hybrid and BAFs to generate higher than market returns, they are not designed to do so.
13/n
They may outperform at some points, but not consistently. They are more to cut volatility in your portfolio and not necessarily to add additional returns.
Don't expect ESFs to give double digit returns. See it as substitute to debt, not equity.
14/n
Don't expect ESFs to give double digit returns. See it as substitute to debt, not equity.
14/n
Who should invest in these funds?
One who wants to reduce volatility of their equity portfolio can invest in Aggressive Hybrid or BAFs.
1st time equity investors who are afraid of market corrections and volatility can invest through BAFs.
15/n
One who wants to reduce volatility of their equity portfolio can invest in Aggressive Hybrid or BAFs.
1st time equity investors who are afraid of market corrections and volatility can invest through BAFs.
15/n
If you are investing in equities for 3 to 5 years, better to go with BAFs or Aggressive Hybrid Funds.
Investors who want to protect their gains from equities at peak can park in ESFs.
Ones who want to earn slightly better than pure debt funds can look at ESFs.
16/end
Investors who want to protect their gains from equities at peak can park in ESFs.
Ones who want to earn slightly better than pure debt funds can look at ESFs.
16/end
Study all these three strategies from @EdelweissMF
Study how are they managed, what are the risks, what to expect, their historic portfolios, net equity levels and historic rolling returns.
Link
edelweissmf.com/types-of-mutua…
Study how are they managed, what are the risks, what to expect, their historic portfolios, net equity levels and historic rolling returns.
Link
edelweissmf.com/types-of-mutua…
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