After overhaul, hybrid funds make more sense
When markets turn
volatile, investors in hybrid funds don’t usually cut and run as the losses are
simply not big enough to scare them away.
Of my
friends and acquaintances who regularly take investment advice from me, one of
the most interesting is an Indian Air Force officer who retired before I was
born. In many ways, his half a century (literally) of retired life is an object
lesson in the value of doing simple things in investing and doing them for a
long time. Of course, my friend is a prosperous man without any financial
worries—his pension is about 350 times the last salary he drew in 1966. While
he does invest in some funds and stocks, like many, or should I say most,
people of his age and background, his heart is most at peace with fixed
deposits in public sector banks.
Even so, he has some fascinating equity investments
in his portfolio. One is that of a multinational company, long listed in India,
in which he bought a 100 shares at the time of his retirement. The price of the
stock in 1966 is now long forgotten, but in this half a century, the number of
shares has increased from 100 to about 14,000 through bonuses and splits. The
value of this investment has gone up from whatever few rupees it had been at
the time of purchase to a sum that is well into eight figures now.
One would think that my friend would be quite
comfortable with volatility in a stock that has made him so much money, but no,
that’s not the way things are. Even now, after 52 years of gains, whenever that
stock falls, he gets worried. Over the last few months, as the equity markets
have turned shaky, the stock has lost around a quarter of its value, and my
friend is fretting, just as he does during every market downturn. He feels that
he should finally sell out, even though I know that he actually will not.
Whether his worries are justified or not (and they’re not), such stress is
common. There are only a few investors who do not suffer it at some point.
However, by and large, seasoned equity investors, those who invest regularly in
stocks, get used to them sooner rather than later.
The greater problem is that of mutual fund investors.
To reap the benefits of equity returns, they must stay invested. And yet, when
the markets are weak, the daily fluctuation in the NAVs of equity funds are
enough to make many of them sell and run. Those with more fortitude eventually
make enough money, but many cut and run, which is a pity.
Which actually brings us back to what I discussed last
week. Once you appreciate the logic of asset rebalancing, then even if you’re
the sort who has the mettle to tolerate volatility, you will probably prefer a
hybrid fund. I’ve always thought that the best solution for beginners (and also
many experienced investors) is to avoid pure equity funds and stick to
equity-debt hybrid funds. They have equity and fixed income in a certain ratio,
which the fund manager maintains. The regular rebalancing saves your equity
gains when the markets turn turtle.
However, just like SIPs, the real advantage of hybrid
funds lies not in the maths but in the psychology. I’ve been seeing for years
that in circumstances when many investors in equity fund investors cut and run,
hybrid fund investors stay put. The losses are simply not enough to scare them.
Amusingly, I’ve often observed that this fastness of purpose is actually
enhanced by the sight of equity funds’ greater losses. Basically, hybrid fund
investors enjoy telling themselves that they are smarter than equity fund investors.
Moreover, Sebi’s recent overhaul and formalisation of
fund categories has delivered what is effectively a new deal for mutual fund
investors, and specially hybrid investors. In one of the coming weeks, we’ll
walk through why this is the case and the exact advantage that each of the new
hybrid categories can deliver to you.
DHIRENDRA KUMAR
CEO, VALUE RESEARCH
CEO, VALUE RESEARCH
ETW 13AUG18
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