Bits-and-pieces funds

Over the last few years, we've had a seemingly unending series of dramatic events which have created uncertainty and volatility for equity investors. However, even though the events themselves all appear to be apparent black swans, the approach investors need to take to protect themselves is straightforward and predictable.

Strangely, the unease produced by such events has been made worse for some investors because of a partial reversal of a longstanding trend. Long time readers may have noticed my recurring comments on the traditionally heavy dependence of Indian savers on fixed-income investments. It's well-known that India favours such investments, with many savers habitually opting for Public Provident Fund (PPF), bank and post office deposits as their go-to saving mechanisms. I've regularly highlighted the importance of directing at least some long-term savings towards equities or equity-oriented mutual funds.

However, an emerging trend is that a segment of the younger saving demographic may embrace equities with excessive enthusiasm. New investors who start with equity mutual funds and initially see positive outcomes often shift their entire portfolio into equities, at times up to 100 per cent. Now, this is not a deadly mistake, but given the chain of apparently dire global events since February 2020, it's something that needs to be tempered. As the pandemic eased and the conflict in Europe and now in the Levant escalated, the resulting global inflation, currency fluctuations, volatile stock markets, increased interest rates by central banks, Western sanctions, China's disease/economic struggles, waning demand, and a looming recession have all taken their toll. Somehow, it has all left many investors - even seasoned ones - a little breathless and wondering if a change in investment tactics is in order.

At the start of this cycle, the initial response to the pandemic saw a drastic sell-off in equities, but subsequent market fluctuations have led to erratic investments driven by short-term predictions and a general trepidation. The successive crises have disrupted conventional investment balances, or at least given an impression that this has happened. On top of that, the rising inflation rates surpassing fixed income returns in most parts of the world have presented new challenges.

The traditional advice in such times would be to adjust your asset allocation, a recommendation I've often supported. The theory is straightforward: if your portfolio balance is off, fix it. But this is easier said than done for the average individual. Tracking and adjusting one's portfolio to align with tax considerations is difficult, with equity and debt markets growing at inconsistent rates and taxable consequences attached to each transaction.

So, what's a practical and effective solution for investors? The bottom line is that there is practically no case for any individual with no fixed-income investments. The only question is what kind. For individuals who like to keep it simple, the entire thing can be done within hybrid mutual funds. However, this is not the entirety of a sound investment strategy - there's more. Any funds needed within the next three to five years should be secured in fixed income to ensure safety and accessibility. By allocating between this safe haven and hybrid funds, investors can cover their asset allocation needs without extensive time and effort - and it's likely sufficient for most.

I understand there is a kind of knowledge barrier to investing in hybrid funds. Equity funds or debt funds by themselves are simpler devices. Conceptually, they have a single purpose - the former is for high returns and the latter for high safety. Hybrid funds are a little bit of this and a little bit of that. They never have the best returns, and they never have the highest safety. And yet, they make sense for more people, more of the time. It's something that takes a bit of effort to appreciate that.

The real-world practicality of hybrid funds becomes apparent when one considers the average investor's constraints - time, knowledge, and the ability to withstand volatility. For these individuals, hybrid funds offer a 'set-and-forget' strategy that requires less day-to-day thought. It's an investment tool that simplifies the investor's engagement with the market and reduces the stress associated with the kind of atmosphere we have seen since February 2020.

Also read: Real, practical asset allocation