SEBI has defined seven different types of hybrid funds that asset managers can offer investors. You have the option of choosing one where the allocation to equity and debt shifts depending on specified market valuation metrics or pick one where the equity debt split is defined and fixed.

Hybrid funds with a fixed allocation also have a lot of variety. An aggressive one can have anywhere between 65%-80% allocation in equity, compared to 10%-25% allocation in equity for conservative hybrid funds. There are others too with an asset allocation band which is somewhere in between the aggressive and conservative extremes. Given these choices, should you find the ideal hybrid fund or is it more prudent to do your own asset allocation?

Match your asset allocation to your goals

Your asset allocation ideally should not be fixed by someone else’s idea of what is aggressive, conservative, or balanced risk. Your financial goals will not match anyone else’s. Ideally your asset allocation will be an outcome of these goals.

Let’s take a simple example, if your top three goals are a property purchase in seven years, your child’s higher education costs after 10 years, and building a retirement corpus, then the bulk of your allocation should be towards equity funds. This will help in growing wealth over the defined long periods. On the other hand, for your goals towards an overseas holiday after a year or down payment on your luxury sedan, you will have to pick stable return fixed income funds.

How much gets allocated to each of these goals again will depend on your requirement for each. Hence, its practically impossible to use a pre-defined asset allocation to fit your individual goals accurately.

Hybrid funds for regular income

Have you heard that hybrid funds offer attractive return through regular returns from the dividend option? It is true that some hybrid funds have a track record for regular dividend payments. Paying out dividend in an equity-oriented fund takes away from growing long-term returns. Dividends are gains taken out from the fund at regular intervals and paid back to you.

Instead if you leave them invested as the case would be for the growth option of the same fund, the value continues to accumulate for a longer period which can benefit you more. If you do need money, you can redeem partially from the fund or build a systematic withdrawal plan which can be more tax efficient that a dividend pay-out. 

How much gets allocated to each of these goals again will depend on your requirement for each. Hence, its practically impossible to use a pre-defined asset allocation to fit your individual goals accurately.

Keep your mutual fund investment choices simple; equity funds for your long-term goals and debt funds for stable return and short-term goals. By doing this you will create your own balanced portfolio which caters uniquely to your goals.