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Diversification through Hybrid Funds

I have invested Rs 10 lakh in LIC Bond Fund and Rs 3 lakh each in Magnum Income and Templeton India Income Builder. Please suggest a portfolio with 40 per cent bond and 60 per cent equity exposure.

I have invested Rs 10 lakh in LIC Bond Fund and Rs 3 lakh each in Magnum Income and Templeton India Income Builder. Please suggest a portfolio with 40 per cent bond and 60 per cent equity exposure.
Laxman Panjwani

It's good to see that you are planning to diversify your investments. Diversification of portfolio across different asset classes is always a great idea. By doing so, you get the stability of debt with the growth potential of equity in one neat package. In your case, an equity-oriented hybrid fund or a balanced fund, as it is usually known, is advisable.

Hybrid funds act as a risk diversification tool and can fulfil your dream of making money without taking the higher risk associated with a pure equity portfolio. While bonds give the portfolio a sense of stability and an attractive flow of income, equities provide the extra boost to returns. Equities have proven to be the best long-term asset class and hence the best hedge against high inflation.

Automatic re-balancing is the biggest advantage of investing in a balanced fund. For example, if equity markets rise, the equity weightage in a balanced fund's portfolio increases. But as most hybrid funds stick to 60-40 equity-debt allocation, they book profit at every rise thus striking a right balance between debt and equity. This takes away your headache of consistent re-balancing of portfolio.



Calendar Year Returns: A Comparison
    2003  2002  2001  2000  1999  1998
  Hybrid: Equity-oriented 66.65 13.43 -9.49 -15.16 94.61 15.17
  Equity: Diversified 112.01 20.07 -19.06 -26.56 113.57 7.39
  Debt: Medium-term 7.65 15.7 16.67 10.66 13.43 11.03
 

    Moreover, hybrid funds are tax-efficient. If you have to do a similar asset allocation on your own, the re-balancing exercises could will result in substantial short-term capital gains in a rising market thus reducing your overall return. Also, for each new investment, you will have to pay an entry load (normally 2 per cent). On the other hand, as mutual funds are treated as pass-through entities, income earned by them (in any form) is exempt from the tax. They don't have to pay either short-term or long-term capital gains tax.

Therefore, we would recommend that you spread your investments over two or three well-diversified equity-oriented balanced funds. Over the long-term, say 3-4 year period, your portfolio of hybrid funds will take care of the volatility in both equity and debt markets and you will end-up making a decent gain. A hybrid fund is ideally a sample of what everyone's portfolio should look like.



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