Dhirendra Kumar
Over the past few years, an unending series of dramatic events has created uncertainty and volatility for equity investors. Even though these events appear to be black swans, the approach that investors need to take in order to protect themselves is straightforward and predictable.
The strange thing is that the unease created by such events has been made worse for some investors because of a partial reversal of a long-standing trend. Longtime readers may have noticed my recurring observation regarding the heavy dependence of Indians on traditional fixed income investments. It’s well known that India favours such investments, with many habitually opting for the PPF, and bank and post office deposits as their go-to savings mechanism. I’ve regularly highlighted the importance of directing at least some long-term savings towards equities or equity-oriented mutual funds.
However, an emerging trend is that a segment of the younger saver population is embracing equities with excessive enthusiasm. New investors, who start with equity mutual funds and see positive outcomes initially, tend to shift their entire portfolios to equities. This is not a deadly mistake, but given the chain of dire global events since February 2020, it’s something that needs to be tempered. As the pandemic eased and the conflict in Europe, and now in the Levant, has escalated, the resulting global inflation, currency fluctuations, volatile stock markets, increased interest rates by central banks, Western sanctions, China’s disease/economic struggles, waning demand, and looming recession have taken their toll. Somehow, it has left many investors, even the seasoned ones, a little breathless, and wondering if a change in investment tactics is in order.
At the start of this cycle, the response to the pandemic saw a drastic sell-off in equities, but subsequent market fluctuations have led to erratic investments driven by short-term predictions and general trepidation. The successive crises have disrupted conventional investment balances, or at least given an impression that this has happened. Besides, the rising inflation rates surpassing fixed income returns in most parts of the world have presented new challenges.
The traditional advice during such times is to adjust one’s asset allocation, a recommendation I’ve often supported. The theory is straightforward: if your portfolio balance is off, fix it. However, in reality, this is easier said than done for an average individual. Tracking and adjusting one’s portfolio to align with tax considerations is difficult, with equity and debt markets growing at inconsistent rates, and taxable implications for each transaction.
So what’s a practical and effective solution for investors? The bottom line is that every person has to have fixed income investments. The only question is which type they should go for. Those who like to keep it simple can easily opt for hybrid funds. However, this is not the entirety of a sound investment strategy. Any funds needed within the next three to five years should be secured in fixed income to ensure safety and accessibility. Between fixed income and hybrid funds, investors can cover their entire asset allocation needs without time and effort, and it’s possibly sufficient for most.
There is a sort of knowledge barrier to investing in hybrid funds. Equity or debt funds are simpler as they have a single purpose: the former is for high returns and the latter for safety. Hybrid funds are a mix of both. They never offer the best returns or maximum safety. Yet, they make sense for people most of the time.
The practicality of hybrid funds becomes apparent when one considers the average investor’s constraints—time, knowledge and ability to withstand volatility. For these individuals, hybrid funds offer an ‘invest and forget’ strategy that does not require day-to-day thought and effort. It’s an investment tool that simplifies one’s engagement with the market and reduces the stress associated with the kind of environment that we have been witnessing since February 2020.
The Author is CEO, VALUE RESEARCH
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