For stress-free wealth creation, investors can invest in this mutual fund

Just like you need a balanced diet of carbs and proteins, your investment portfolio also requires the right mix of equity and debt to build wealth in the long run. For slightly conservative long-term investors, we suggest a 70-30 asset allocation, with 70 per cent in equity and 30 per cent in debt. (For those new to this, the equity portion can grow your money in the long run, while the debt portion will protect your corpus.)

Here's how you can achieve the desired 70-30 equity-debt allocation:

Option 1: Flexi-cap fund + short-duration debt fund

The first is a DIY (do-it-yourself) option. Here, you invest your money in the following two funds:

• Flexi-cap fund: This fund invests in equities across companies of various sizes (large, mid, and small cap), aiming to grow your money over the long run.
  
• Short-duration debt fund : This fund invests in short-term bonds and offers steady returns by taking less risk.

Option 2: Aggressive hybrid fund

This is an autopilot option. You put your money in this fund and let the fund manager take care of the balance between equity and debt.

• These funds invest 65-80 per cent in equity in companies of all sizes and 20-35 per cent in debt.
  
• Professional fund managers handle the equity-debt balance for you.

Now, let's find out which is the better choice.

Level of complexity

While the DIY (do-it-yourself) option of combining flexi-cap and debt funds allows for greater customisation and satisfaction, managing and rebalancing equity-debt allocation can be a delicate affair, especially if you are not a seasoned investor.

On the other hand, aggressive hybrids are managed by experienced professionals. These experts maintain the equity-debt balance, so you don't have to worry about rebalancing your investments from time to time.

Cost

Every investment has its cost. In the case of mutual funds, it is the expense ratio. It is an annual fee a mutual fund charges its investors to cover its expenses (manager's salary, advertisement cost, etc.).

On this front, aggressive hybrid funds come with a slightly higher price tag than a DIY combo of flexi cap and short-duration debt funds. But we're not talking about break-the-bank differences here, as the median difference between the options is just 0.18 per cent in the last five years.

Tax

Aggressive hybrids enjoy a significant advantage here. In their case, the fund manager buys and sells equity and debt investments internally without triggering any tax liability for the investor. Moreover, even your debt allocation gets favourable tax treatment since the funds are treated like an equity fund. (In case you didn't know, equity fund gains have a lower tax liability than debt funds.)

In contrast, a DIY flexi-cap and debt fund combination requires you to actively buy and sell to maintain your desired equity-debt balance. This hands-on approach requires you to pay capital gains tax each time you are buying and selling investments, which, over time, can become significantly large.

Performance

Let's come to perhaps the most important metric: long-term returns. Here, it's pretty tight between aggressive hybrids (red line) and the DIY combo (green line) over the last five years. The two options are neck and neck during volatile periods, too.

However, remember that the post-tax returns may weaken DIY's case, as manual rebalancing attracts higher taxes (something we have explained in the 'Tax' section).

To sum up, if you are a conservative investor and want to simplify your investing experience, we suggest you look at aggressive hybrid funds because of their tax-efficient rebalancing and overall favourable tax treatment.

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Also read: Three advantages of aggressive hybrid funds over equity funds