Will hybrid funds help during a market crash? Nifty vs 65% Nifty+35% bonds

Would an aggressive hybrid fund (aka balanced funds) fare better during a market crash than the NIfty? Do you have the right expectations from aggressive hybrid funds?

Published: March 26, 2020 at 11:09 am

Last Updated on December 29, 2021 at 5:27 pm

On March 23rd 2020, a SIP in Nifty 50 started 10 years ago crashed to an annualised return of 2.3%. If that SIP was started 14 years ago, it would have just returned 4.91% and this is before taxes and fund expense ratio!! If instead of the Nifty 50, a hybrid index with 65% Nifty and 35% bonds was used, would it have helped during this market crash? Do investors have the correct understanding and expectations about hybrid funds? Let us find out.

What should investors do now? If you are worried (as you should be) about the ongoing crash there here is a FAQ: Should we exit from equity mutual funds now to prevent further loss? We reported earlier that the Sensex lost 30% twice as fast as 2008 crash! If you are looking for a confidence-booster try, Worried about the market crash? Use emotions to understand the cost of pulling out. Also see: Can I invest surplus cash in equity or rebalance my portfolio now or wait?

Regular readers may recall we had simulated how a long-term SIP will fall after a market crash in March 2019: Mutual Fund SIPs Do Not Reduce Risk! Beware of Misinformation. Now investors have a practical example which significantly steeper!

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Constructing the Hybrid Index: Using data from ACEMF, we construct a CRISIL Blend Index using two-hybrid indices: CRISIL Balanced Index (April 2006 to Dec 2010) and CRISIL Hybrid 35+65  Aggressive Index (Jan 2010 to Mar 2020),

This patchwork is necessary as CRISIL changed its hybrid index methodology. CRISIL Balanced is 65% Nifty and 35% CRISIL Composite Bond Fund Index.  CRISIL Hybrid 35+65  Aggressive Index is 65% BSE 200 and 35% CRISIL Composite Bond Fund Index. The composite bond index currently has the following weights

  • CRISIL Composite Gilt Index 45%
  • CRISIL AAA Long Term Bond Index 16%
  • CRISIL AA and AA+ Long Term Bond Index 3%
  • CRISIL AAA Medium Term Bond Index 10%
  • CRISIL AA and AA+ Medium Term Bond Index 3%
  • CRISIL AAA Short Term Bond Index 18%
  • CRISIL AA and AA+ Short Term Bond Index 5%

The second method is to build a 65% NIfty + 35% Crisil Composite Bond based on their daily data. We take 65% of Nifty 50 TRI daily returns and 35% of the bond index daily return to create daily data for the blended index. This amount to daily rebalancing and is overkill as realistic indices are rebalanced monthly. Nonetheless, it would be instructive to see its performance.

price movement of Nifty 50 TRI and two hybrid indices
The price movement of Nifty 50 TRI and two-hybrid indices

There are no hybrid index funds in India. Choose an active fund for comparison would result in selection bias. The returns you see here are before taxes and expenses. Tax associated with rebalancing the portfolio need not be considered for a blended index (as done for a hybrid mutual fund)

Ten-year SIP

Please keep mind returns from 65% Nifty + 35% CRISIL Bond Composite could vary in reality as we have constructed it differently

From 2-Mar-2010 to 23rd Mar 2020

NIfty 50 TRI XIRR: 2.33%

CRISIL Blend XIRR: 4.09%

65% Nifty + 35% CRISIL Bond Composite XIRR: 4.82%


Fourteen-year SIP

From 3-Apr-2006 to 23rd Mar 2020

NIfty 50 TRI XIRR: 4.91%

CRISIL Blend XIRR: 5.71%

65% Nifty + 35% CRISIL Bond Composite XIRR: 6.45%

What do these numbers indicate?  A blend with 65% Nifty will not protect you from a market crash. It would fall less but the so-called “downside protection” would not be as much as investors unrealistically expect.

In a poll on expected returns conducted in Facebook group Asan Ideas For Wealth no one believed after this crash that a portfolio of stocks + bonds would underperform just stocks after 14 years! That is what a crash does to you!

Yet if I had asked this question in Dec 2019 or Jan 2020 the answers would have bee quite different. In fact, the reality is different too!  The Nifty portfolio would have comfortably outperformed the hybrid portfolio just before the crash!

What do these results indicate? Your hybrid fund will not protect you from market crashes. A portfolio of 65% equity is only a little bit less risk than a portfolio with 100% equity. We have pointed this out several times before and suggest considering an aggressive hybrid portfolio as equity.

Recognise that the volatility is only about 25% lower. So don’t expect your balanced fund to not fall at all when the market falls. Just that it will fall less. – Why Aggressive Hybrid (balanced) Mutual Funds score over diversified funds (Oct 2018)

Investors seem to have unrealistic return and risk expectations from a hybrid portfolio when the market is down. Hopefully, these results would help reset those expectations firmly on the lower side.

Ps: An actively managed aggressive hybrid fund typically holds more than 65% stocks!!


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