Last Updated on February 12, 2022 at 6:19 pm
In this post, I discuss how balanced advantage funds are different from aggressive hybrid funds and when and how investors should choose from these categories. One of the wrong questions that investors ask is, “how much return can I expect from this fund or this category of funds?”. Well, they should first be asking, “how much risk can I expect from this fund or fund category?”
The reason is simple: classification of funds into categories is based on risk and not return and this is true of all asset classes – stocks, bonds, gold, currency. However such risk classification is not always as simple as we will see below for Balanced Advantage vs Aggressive Hybrid Funds and this means return classification is impossible. This is why investors should understand what the different types of hybrid fund available, where can each invest and where are they placed in the risk vs reward (return) space. So let us start with the basics.
What are hybrid mutual funds?
These are mutual funds that invest in 2 or 3 different asset classes at any time: stocks + bonds or stocks + derivatives (arbitrage) or stocks + bonds + gold. In terms of taxation, they are either like equity funds or non-equity funds and can even switch between the two. Want to know what arbitrage is? See: How Arbitrage Mutual Funds Work: A simple introduction
If you want to understand the difference between an equity and non-equity fund and the latest tax rules, see:
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
What are the different types of hybrid funds?
- Hybrid Aggressive funds (min 65%-80% in stocks + bonds)
- Hybrid Arbitrage (arbitrage + small amt of bonds)
- Balanced Hybrid (40-60% stocks with no arbitrage)
- Conservative Hybrid (10-25% stocks and rest in bonds)
- Dynamic asset allocation aka Balanced Advantage (variable stock and bond exposure)
- Equity Savings (min 65% equity much of it will be arbitrage)
- Multi-Asset allocation (min three asset classes with 10% min exposure in each)
For this study, we consider at least 3-year old hybrid funds. The balanced hybrid category does not have any such fund (since many underwent changes after the SEBI fund category regulations) and is not considered. Thankfully many funds in the balanced hybrid are thematic – aimed at child education, retirement or age-based asset allocation. So you can straightaway avoid these.
Balanced Advantage vs Aggressive Hybrid Funds
The essential difference between balanced advantage and aggressive hybrid is the equity asset allocation. In a balanced advantage fund, the equity allocation can swing from 80% to 40% depending on market conditions. In an aggressive hybrid fund, the equity allocation will at least be 65%. Here, by equity allocation, I am referring to non-arbitrage holdings.
This should, in principle result in a good differentiation between risk and reward. Unfortunately, that is not the case as we shall see below. This is the reason, investors should be really careful in choosing and using these funds.
Risk vs Return: The general pattern
The following is how returns fluctuate with increasing risk.
Notice that the cone gets wider with increasing risk. This means that as risk increases, the spread in possible returns increases. This is what risk actually means. If a sales guy tells you that you can expect 15% return from this fund “over the long term”, she actually means, 15% +/- 10% so anywhere between 5% to 25%. What you end up with is potluck.
Risk-reward spectrum for hybrid mutual funds
Our tasks will be to try and reproduce the above schematic with real data for hybrid funds. I have taken all rated hybrid funds from value research (in the assumption that they have not changed character after the SEBI categorization). Listed their 3-year volatility (standard deviation) and 3-year return.
Then I created an upper return band: 3Y return + standard deviation (red dots) and a lower return band: 3Y return – standard deviation (black dots)
First, notice that the upper and lower return points fall on top of each other for the arbitrage funds. This essentially means that the risk for them is quite low. In fact, they are found on an island on their own. As we move right, the risk increases and the band quickly separate and move apart.
Notice, how risk equity savings funds are. Be very careful of these as returns could be negative. Unfortunately many so-called conservative hybrid funds are equally volatile (some more!).
The multi-asset allocation funds are all over the place! Making them virtually unclassifiable in term of risk or reward.
The balanced advantage or dynamic asset allocation funds overlap considerably with the aggressive hybrid funds and that is such a shame at least as of now.
When and how to choose Balanced Advantage funds?
Only for the long-term at least 7 years away with the right asset allocation. About 40% between 7-10 years (only for the first few years) and not more than 60% above 10 years. Use if you prefer lower volatility. However, you must make it a point to select funds with low volatility. For example ICICI Prudential Balanced Advantage Fund: Performance With Low Volatility. This has a standard deviation (x-axis) of about 8%. So you can spot where it is in the above graph.
Never choose monthly dividend plans of balanced advantage funds! It will destroy your wealth.
A balanced advantage fund with low volatility can help you sleep better.
When and how to choose Aggressive Hybrid funds?
Use only for long-term goals with asset allocation as above, but if you are an aggressive investor. I would recommend that you use for 10+ year goals only. So you can look for a volatile aggressive hybrid fund (high standard deviation). However, please keep in mind the associated risk.
Watch the video version of this post.
When and how to choose arbitrage funds?
You can treat them as a tax-efficient debt component of a long-term portfolio. Use them for generating income. I have written about this in great detail before:
- Generating tax-free income from arbitrage mutual funds?
- Choose arbitrage funds from my handpicked mutual funds september 2018 (PlumbLine)
When and how to choose conservative hybrid funds?
Don’t choose them! You don’t need them!
When and how to choose equity savings funds?
Avoid! If you must, use them for 7Y+ goals in moderation about 40%.
When and how to choose multi-asset allocation funds?
Again, avoid. You can consider a fund with tactical asset allocation strategy like the erstwhile ICICI Dynamic fund (now a multi-asset allocation fund), but tread with caution. Use only for long-term goals and if you are a conservative investor who believes in equal diversification across stocks golds and bonds rather than dynamic asset allocation (of course not all funds practice equal allocation).
This is confusing! What should I do?
Do not look at the funds! Look within yourself! Define your need clearly and the answers will be easy. Once you list your goals, use the Freefincal Robo Advisory Software Template. It will give you a start-to-finish financial plan along with the list of products to invest in PlumbLine
Wish you all a happy and safe Deepavali and Diwali
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)