The oft ignored fund category

A reader has asked me which is the best SIP, in the present volatile markets. Honestly speaking, I don't know. But this question prompts me to write about the often ignored fund category, balanced mutual funds. Why do I say “ignored”? Have a look at the list of equity-diversified funds or the debt medium term funds. Now compare the number of funds in these lists to the number of hybrid funds of the equity-oriented type or debt-oriented type. Got the idea? Fund companies, investors and mutual fund distributors have kind of ignored this fund category, which ( in my humble opinion ) demonstrates the true benefits of mutual fund investing by protecting investors ( to a certain extent ) from the vagaries of the market.

First let’s try to understand what are hybrid ( or balanced ) funds:
Hybrid equity-oriented: Their fund objective is to invest around 70% in equities and 30% in debt.

Hybrid debt-oriented: They do the opposite of equity-oriented schemes by investing 30% in equities and 70% in the debt market.

Now let’s understand how they act to protect you from the vagaries of the market. Please note that this is possible only if the fund objective is adhered to. There have been cases where fund managers have failed to adhere to the fund objective.

Say for example, you invest Rs. 100 in a hybrid equity oriented fund. The fund manager invests Rs. 70 out of it in the equity market and the rest in debt ( this is just an example!). Because of the phenomenal bull run ( like the one seen in last quarter of 2007 ) the Rs. 70 invested in equity has become Rs. 120. Keeping in line with the fund objective the fund manager will re-allocate the assets so that the 70:30 ratio between equity and debt is maintained, which means Rs. 45 in debt and Rs. 105 in equity. Thus the responsibility of portfolio re-allocation shifts from the investors to the fund manager. When the market crashes ( like in 2008 ), the fund manager can shift assets from debt to equity to keep the ratio intact. This ensures that equities are bought when they fall ( Buy Low ) and sold off when they appreciate substantially ( & sell high ).

Those seeking greater capital protection can opt for debt-oriented hybrid funds which work along similar lines but are less volatile than equity-oriented hybrid funds.

P.S: Any discussion about hybrid funds is incomplete without a mention of Mr. Prashant Jain who has been managing HDFC Prudence fund since the last 15 years, which is a record of sorts in India where fund managers keep changing jobs every 2-3 years. He has not only managed this fund over a vast period of time but also produced excellent returns. His interview was published on the personalfn website in October, 2007. Key takeaways from this interview, he invests his own money in HDFC mutual fund schemes and this gives a huge sense of confidence to the investors in HDFC mutual fund schemes. ( Disclaimer: I am an investor in the HDFC Prudence Fund )