Lovaii Navlakhi
International Money Matters
We like multitasking: talking while driving, texting while talking, playing while watching TV, the list goes on. We also like options that make our life simpler. If we have an option, where our asset allocation will be taken care of automatically, well we like that option too. Why not explore a little into hybrid funds and see if they make our lives simpler or are not worth our time.
Hybrid fund or balanced fund: Is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk.
These funds usually maintain atleast 65% in equity so that the fund gets tax treatment similar to equity funds.
Hybrid funds are great for investors who are looking for a single investment vehicle to create a diversified portfolio as it has exposure to both equities and debt.
It will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market. In a scenario where both equities and debt are hit, balanced funds are impacted negatively as well.
Balanced funds continuously rebalance their portfolios to ensure that the broad asset allocation is not disturbed. Therefore, the profits earned from the stock markets are encashed and invested in low risk instruments.
This helps the investor in maintaining the appropriate asset mix, without getting into the hassles of rebalancing the portfolio on their own. Comparing them against each other may be difficult as you would need to know exactly how much exposure to equities each fund has.
However, even if one is invested in a balanced fund, continuous monitoring is required. Since equities are a big part of balanced funds, the investment horizon must be more than a year at the very least.
Lovaii Navlakhi, CFP, is the CEO of International Money Matters and The Financial Alphabet.
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