The Mutual Fund Show: Schemes That Help Reduce Risk Of Investing In Equities

As Indian benchmarks scale newer highs by the day, investors can seek mutual funds that invest in various asset classes to minimise risk. Balanced advantage funds and multi-asset funds are two such options.

Balanced advantage funds, also known as dynamic asset allocation funds, are a category of hybrid mutual fund schemes that invest in equity and debt and keep modifying their asset allocation based on market valuations. Since they’re classified as equity funds by the market regulator, they’ll have 65% of their investments in equities and related instruments.

The advantage of such funds, according to Raghav Iyengar, chief business officer of Axis Mutual Fund, is their managers can reduce what’s known as the “unhedged equity”. They’re ideal for conservative investors who don’t want to put all their money into equity at a particular time but also want to enjoy experience of an equity investment, he said.

“Let’s say if markets are very high, as people are feeling they’re today, the portfolio model shows out you have to reduce your equity exposure; the equity exposure is brought down to about 44-45% and then 20% is put into arbitrage funds so the total becomes 65%,” he said on BloombergQuint’s weekly series The Mutual Fund Show. “The remaining 35% is put in debt.”

Multi-asset funds are typically open-ended schemes investing in equities and related instruments; debt and money market instruments; and those related to gold.

Iyengar said such funds give investors a “rounded exposure over the long term”, and are useful for those can’t make calls on asset allocation themselves. To achieve this, such schemes, he said, put capital in a set of assets that are negatively correlated—or don’t move in tandem with each other.

Santosh Joseph, founder and managing partner of Germinate Investor Services LLP, said these two schemes are “categories of the future”, as they answer two critical questions for the investor: “Can I stay invested irrespective of the good times or the bad times in the markets?” and “Can I stay invested irrespective of the market movements?”

Multi-asset schemes will “blossom into a big category” as it will witness massive inflows in the coming days and years ahead, he said. “The act of booking profits out from equities at highs and parking that money into debt, and vice versa when equities correct, will result in a pleasant investing experience for an investor, enabling her or him to stay invested for a long time and create wealth.”

For the multi-asset category, Joseph recommended funds from HDFC, Motilal Oswal, Nippon India AMC, ICICI Prudential and Axis, and in the balanced advantage segment, he suggested funds from Axis AMC, DSP Mutual Fund, IDFC Mutual Fund and Edelweiss AMC.