A Fund Manager Explains Hybrid Funds and SIFs | Ft. Bhavesh Jain
AI-extracted key points, takeaways & quotes
Hybrid mutual funds, particularly balance advantage funds, use different asset allocation models like valuation or momentum to protect downside and deliver equity-like returns with lower volatility. This matters because it allows investors to capture market returns without enduring severe drawdowns.
◆Main Points
Hybrid funds use different asset allocation models, primarily valuation-based or trend/momentum-based.
Valuation models lower equity exposure when market multiples are high compared to historical averages.
Trend models increase equity when markets show strength and reduce it during weakness using moving averages.
Combining valuation and trend models restricts equity allocation to a moderate 50-60% range, diluting the benefits of both.
Fund managers use derivatives like index futures and put options to adjust equity allocation efficiently.
Using derivatives avoids the high trading costs, impact costs, and tax implications of selling physical equity.
Fixed income in hybrid funds is kept simple using plain accrual strategies with AAA-rated assets.
Liquid funds and T-bills are pledged as collateral for derivative trading margins.
Trend models rapidly reduce equity exposure as markets fall below moving averages or volatility spikes.
During the 2020 COVID crash, trend models limited downside better than valuation models which added equity prematurely.
Indian markets have remained trending 75% of the time over the last 15-20 years, favoring momentum strategies.
Diversifying between valuation and trend-based funds is recommended rather than choosing just one.
✓Takeaways
Trend-following models protect capital by exiting falling markets quickly rather than trying to catch the bottom.
Valuation-based models outperform in rangebound or choppy markets where trend models get whipsawed.
Derivatives are essential tools for large hybrid funds to manage allocation shifts without tax and cost penalties.
Balance advantage funds offer equity-like returns with significantly lower volatility and drawdowns.
Surviving severe market drawdowns is critical for long-term compounding, making downside protection invaluable.
Aggressive hybrid and balance advantage funds can effectively replace large-cap equity funds for risk-averse investors.
“Quotes
"If market is showing strength increase your equity allocation and if market is showing weakness reduce your equity allocation."
"We are firm believer of price. We feel that all the good and bad news is reflected in the price."
"You can either be Rahul Dravid or you can be Virat Kohli; you cannot say I want to be a combination of both."
"To enjoy that 12% CAGR you have to stay invested for seven years and survive that 40% draw down."
"Probability of me getting it right is almost three times higher compared to a valuation based fund."
"In balance advantage fund if you stay invested for 3 to 5 year you will get equity like return with much lower volatility."
⚙Tools
5-day and 12-day moving averages
50-day and 100-day moving averages
One-year volatility index
Index futures
Index put options
Stock call options
✦Facts
The last negative year for Nifty was 2015, and before that 2011.
Balance advantage fund equity exposure typically ranges between 30% and 80%.
Round-trip trading costs for physical equity are 35-36 basis points, versus 4 basis points for derivatives.
During the 2020 COVID crash, Nifty fell 38% from 12,400 to 7,600 in just two months.
A trend-based balance advantage fund fell only 14% in the 2020 crash, while a valuation-based peer fell 27%.
Aggressive hybrid funds have a standard deviation of 9-10, compared to 13 for large-cap equity funds.
↗References
Nifty 50 index
Edelweiss Balance Advantage Fund
Edelweiss Large Cap Fund
Edelweiss Aggressive Hybrid Fund
Edelweiss Nifty ETF
Demat IPO stock example
→Recommendations
Diversify investments between both valuation and trend-based balance advantage funds.
Replace large-cap equity funds with aggressive hybrid or balance advantage funds for better risk-adjusted returns.
Avoid hybrid funds that combine valuation and trend models, as they fail to commit to either strategy effectively.
Maintain a 3 to 5-year investment horizon when investing in balance advantage funds.
Choose trend-based models if you believe markets will continue to trend directionally most of the time.
Do not chase recent 3-year performance, as market cycles can quickly reverse favored strategies.
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