Often, the biggest challenge for investors lies in reducing the gap between a fund’s performance and their own investment portfolio performance. And what tends to come in the way is not the market or fund outcomes—over cycles, these outcomes end up delivering—but how the investor ends up controlling their own investing journey through those cycles.
The popular adage goes, ‘Get greedy when others are fearful and vice-versa,’ but doing so in real life is very tough. Here’s a look at three types of funds that investors could consider.
Balanced advantage funds
Balanced advantage funds, or BAFs, aim to eliminate an investor’s tendency to overreact on either side of a market cycle. BAFs do this by automating the process of equity allocation based on time-tested models.
They try to increase equity allocations when valuations are reasonable and reduce them when they turn expensive. There is also allocation to debt, which provides stability. Different BAFs use various measures to gauge whether market valuations are cheap or expensive.
Some rely on traditional valuation metrics such as the price-to-earnings (P/E) or price-to-book (P/B) ratios of benchmark indices like the Nifty 50. When these ratios climb above their historical averages, the fund reduces its equity allocation. Others follow more sophisticated models that blend valuation indicators with sentiment and momentum data.
BAFs are positioned to capture much of the upside over the long term, while making sure the journey over that period is less volatile, and last, but certainly not the least, protect the downside to a degree when the markets decline.
But different BAFs follow different rules. So, check with your financial advisor before picking the right one for you.
Multi-asset funds
The second category that deserves even more attention is multi-asset funds. Given that this category is relatively new, it is fair to assume that it is the least-owned fund among the portfolios of individual customers. These funds invest in at least three asset classes— typically equities, debt and gold.
Some even include silver, international equities, commodities and real estate investment trusts for added diversification. If there is one time-tested tenet in terms of long-term portfolio success, it is that the right asset allocation held over a long period is the biggest contributor to eventual returns.
In a world where asset correlations are constantly shifting across asset classes, multi-asset funds offer you an allocation solution within the product itself.
The 2020 pandemic crash triggered a surge in gold prices as equities fell, helping such funds limit their losses. Even more recently, gold, silver and debt have done relatively better for portfolios, while equity continues to deliver superior returns over the long term.
Most multi-asset funds—just like BAFs—also use models to judge the relative attraction of various asset classes, thus adding the most vital ingredient to the overall portfolio, which is disciplined investing.
It would, therefore, be safe to conclude that if there is one product that an investor can almost hold forever, it is a multi-asset fund. And if there ever was a choice of only one fund an investor could hold in any mutual fund, it should be the multi-asset fund because that represents the good of all that the fund seeks to do across its franchise.
Equity-debt portfolios
For those who prefer to keep things simple, aggressive hybrid funds (typically 65-80% in equities) and conservative hybrids (10-25% in equities) remain reliable middle paths. They allow investors to gain equity exposure without the full risk of the equity markets.
Unlike BAFs that constantly shift gears, these hybrid funds maintain a defined mix of equity and debt. The equity portion delivers growth, while the debt component acts as ballast, cushioning the portfolio during downturns.
These funds are for investors who prefer predictability over tactical shifts. And who prefer to manage their asset allocations and still have control over the extent of their equity exposure.
Conclusion
In the world of investing, balance and discipline are often underrated. They lack drama, but over the long term, they end up being winners.
Differently put, you can choose to navigate your investing journey as a series of 100-metre sprints. But if you are clear that you are in for the long haul, then the hybrid world brings you a range of products designed to approach the task just as a successful marathon runner would.
Anthony Heredia is MD and CEO of Mahindra Manulife Mutual Fund