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Funds for the balance

Few savers need any tool beyond hybrid funds to maintain the asset allocation they need

Funds for the balance

Last month, I had a multi-part discussion in this column about how to arrive upon an ideal equity-debt asset allocation pattern that would suit your investing needs. I had advised against taking either debt or equity in homeopathic doses. Equity provides returns at the expense of stability and debt provides stability at the expense of returns. That's simple to understand. When you appreciate that, it should also be self-evident that injecting a tiny bit of debt in a largely equity portfolio, or doing the opposite serves no purpose. There has to be enough of either to actually make a difference.

There are a few exceptions. For one, young people who have just started investing may choose to stay 100 percent in equity because that's a point in life when extra volatility should not matter that much. However, as you get on with the business of life, you should have higher and higher fixed-income exposure. Still, there's no point in letting things get too complex. I'd recommended that it's best to think of two simple levels: 1/3rd and 2/3rd. You're either at a stage of life when 1/3rd equity and 2/3rd fixed income is about right, or you're at a stage when 1/3rd fixed income and 2/3rd equity is about right.

There's no point overthinking this, nor is there much point trying to fine-tune it precisely. If you want 1/3rd debt and as the markets move, it goes down to 30 percent instead of 33 percent, it does not mean that urgent and immediate action has to be taken. You need to correct it but too much involvement in one's investments is as bad as none at all.

The best option would be if one could just pick one or two mutual funds and start SIPs, and the funds themselves would do the balancing. Obviously, I'm referring to balanced funds, or as they are more fashionably known now, hybrid funds. After SEBI formalised different categories of funds in June 2018, we have several categories of hybrid funds that can fit the three levels of asset allocations. It's not a precise match to the levels I have specified since they are all specified to be in a range, but they will do the job.

The three major categories of hybrid mutual funds, under which an adequate number of funds are available are the following, with the range of equity percentages allowed given with each: Conservative Hybrid (10-25), Balanced Hybrid (40-60) and Aggressive Hybrid (65-80). There are some caveats with each, and you must do your research on Value Research Online before making your choices. A good starting point is this article.

You will find that within the ranges specified, individual fund managers have different approaches but even so, it's not hard to find a set of funds that satisfy the asset allocation level that you have decided for yourself. Once you have chosen such funds, you would of course start SIPs in them. As time goes by, you should obviously keep an eye on the overall asset allocation of your portfolio. Doesn't that bring back some complexity into your investments? It would, but only if you don't use a tool like 'My Investments' on Value Research Online. Using 'My Investments', you can upload your fund statements and then track your changing asset allocation with zero effort. You don't need to do it every day - just once every two or three months is enough. It's a lot less work than investing in different types of stocks and funds and then doing the fine-tuning manually.

When things go seriously out of whack, you will have to increase investing in some funds and decrease in other funds. Similarly, as life goes on and your needs change you will at some point gradually shift your asset allocation to a more conservative or (maybe) aggressive level.

With a systematic and conceptually clear approach like this, managing an entire life-cycle of investments can be quite low-effort and simple.