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Does your asset allocation need hybrid funds?

You can invest in equity, debt, or even gold funds separately or you can combine these assets through hybrid funds with pre-determined asset allocation. While the latter sounds like an easier choice, keep in mind some basic factors before you invest.

Every investor knowingly or unknowingly has an asset allocation. You invest in equity and debt mutual funds, own a few bank deposits, own some gold and maybe property. This is asset allocation. It may not be a conscious one but, in its most basic form, diversifying your money across different financial securities and assets is called asset allocation. 

If you are a mutual fund investor, you can choose to invest across assets like equity, debt and gold. Ideally, you should have a mix of these assets. You can invest in equity, debt and gold funds separately or you can combine these assets through hybrid funds with pre-determined asset allocation. While the latter sounds like an easier choice, keep in mind some basic factors before you invest. 

Hybrid funds aren’t customized

Hybrid funds are of different types, some with just a combination of equity and debt securities and others which include equity, debt and other asset classes. Moreover, the proportion of each asset also varies depending on the type of hybrid fund; some may have just 20%-30% of total assets in equity and others could go up to 60%-70%.

The choice is there, however, it is not customized for each individual. Ideally, how much you invest in equity or debt will depend on your financial goals and the time needed to fulfil them. A standardized allocation of 60-40 or 50-50 may be either too conservative or too aggressive for you. In which case you will either earn a lower growth rate than you need or would have taken on too much risk. You risk the outcome being something different from what you are looking to achieve. 

The change in asset allocation within a specified range can happen for a hybrid fund, but it is driven by market value rather than what you need. 

Change in allocation

You may want to change your asset allocation as time goes by depending on the change in your circumstances. It may be that you got a new job with a higher salary and you choose to invest additional amounts only in equity because you don’t need any more debt. Having a high allocation to hybrid funds will not help as the fund itself won’t change the allocation. 

The change in asset allocation within a specified range can happen for a hybrid fund, but it is driven by market value rather than what you need. 

Rather than relying on this automatic asset allocation, its best to model your own depending on your goals and understanding of risk. When there are changes in your inflows or outflows or goals, you can alter the asset allocation yourself accordingly. 

Hybrid funds for actively managed portfolios are generally not an optimal choice and will only clutter and confuse your long term growth expectation. 

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