Last Updated on June 3, 2021 at 10:17 am
Sriram asks, “Instead of separately investing in equity mutual funds and fixed income and then worry about rebalancing and pay taxes, why not use just one aggressive hybrid mutual fund for long term goals? This has both equity and fixed income. The rebalancing is automatic, and we do not have to pay tax”.
On its face, it seems like a good idea and, in principle, definitely possible to pull off. However, aggressive hybrid funds are only a notch or two less volatile than equity mutual funds. For example, the max loss in a portfolio investing in the CRISIL 65% Equity 35% Debt Hybrid Index is 17% for five year periods between Jan 2011 and June 2021.
If the portfolio only had Nifty 500, then the max loss would be 29% during this period. That is, the Aggressive Hybrid Index suffers about 60% of the equity index loss. When stated like this, this seems obvious and trivial. If we extend the study period to the mid-’90s and the investment tenure to 15 years, the max loss for the equity index is 60%.
If we assume the hybrid index suffers 60% of 60% loss, it is still 36%. It is one thing to do a backtest and report this and quite another to invest in one fund and see its value erode by that much. More importantly, the equity allocation of aggressive hybrid mutual funds is typically higher than 65% by about 5-20% more. So the losses would be more.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
For the 5Y study, the max time during which the agg-hybrid fund was underwater was about 5 months. Just one month less than a 100% equity portfolio. Now for the 15Y study, the 100% equity portfolio was underwater for 40 months. Even if we (incorrectly) assume that the agg-hybrid fund portfolio would only be underwater for 60% of that period, it is still 24 months or two years.
The 100% equity portfolio volatility over 5Y as measured by the standard deviation is between 23% (max) top 12% (min). The corresponding numbers for the agg-hybrid portfolio are 16% (max) to 8% (min).
Even investors who claim this volatility and downside are acceptable to them will have to consider another debt option in a few years to de-risk the portfolio as it approaches the goal deadline. This de-risking is a continuous process that must begin well in advance.
A one-fund portfolio with an aggressive equity fund would be just as volatile as investing in an equity mutual fund for most investors. Therfore we recommend that investors treat aggressive-hybrid funds as pure equity funds (disregarding the debt component) and include them only as part of a balanced asset allocation with regular rebalancing and continuous de-risking; for example, 50% to 60% aggressive hybrid funds and the rest in fixed income. Fear of paying tax (or saving tax) should never be the primary consideration for deciding investment choices.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => 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 over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
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)