What are the rebalancing criteria for hybrid funds? | Value Research Read to know the two approaches to rebalance hybrid funds
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What are the rebalancing criteria for hybrid funds?

Read to know the two approaches to rebalance hybrid funds

Hybrid funds are a type of mutual fund whose portfolio includes equity and fixed income. A blend of the two offers good returns while not being too risky. Fixed income helps stabilise your portfolio and cushion the downfall and equity helps you get an inflation-adjusted return and provide growth to your portfolio.

There are seven different categories within hybrid funds with different allocations to suit the different needs of investors. They are aggressive hybrid funds, conservative hybrid funds, dynamic asset allocation funds, balanced hybrid funds, arbitrage funds, multi-asset allocation funds and equity savings funds .

These funds have a unique asset allocation as set by the mandate and they generally rebalance their portfolios at regular periodic intervals. Under the SEBI circular, all funds are now mandated to rebalance their allocation within 30 business days in case of any deviation from the set mandate. The funds have to follow that set ratio, and they take two different approaches to rebalance the set allocation.

The first approach is the steady-state allocation method, where the equity and debt portion are always fixed. For example, aggressive hybrid funds are mandated to maintain an equity allocation of 65 to 80 per cent and the rest in fixed income. Whenever the equity portion exceeds a specified limit, the fund manager will book profits and invest that money into debt. Or if the equity allocation is reduced, the manager will sell some of the debt and invest it in equity. This is done to maintain the allocation. If the fund is deviating, they are rebalanced within a month.

The second approach is the dynamic or tactical allocation method. This is usually followed by dynamic asset allocation or balanced advantage funds. Here the funds are totally unconstrained. They have complete flexibility to invest across equity and debt instruments in any proportion and then dynamically alter the mix of debt and equity depending on their market outlook or several other factors that they may want to take into consideration. Here, the fund manager may take a call based on market conditions or they may have set algorithms based on market P/E on which they change the allocation between equity and debt.

Suggested read: How often should I rebalance my portfolio?


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