Hybrid funds can be an excellent tool for investors to make the best of equity and debt asset classes. They provide ample opportunities for investors for tapping into the earning potential of equities while maintaining stability with investments in debt instruments. However, asset allocation strategies have a significant bearing on the performance of hybrid funds especially aggressive hybrid funds which have a heavier equity weightage. The following are the three main asset allocation strategies that you can dabble with when investing in hybrid funds”.

In this strategy, the asset allocation mix is fixed and is based on the investor’s goals and risk-taking abilities. The fund manager maintains the established ratios of the different asset classes in the portfolio and strives to maintain it irrespective of the condition of the market or macroeconomic indicators. However, asset rebalancing may be required because the weightage of different assets in the portfolio may get deviated from the predetermined composition owing to changes in market conditions. In order to make the portfolio revert to its original allocation mix, assets may have to be bought or sold – for instance when equities are on an upswing and their values increase, the manager may have to reduce equity holdings and move to debt to maintain the static allocation.

Tactical asset allocation is an active portfolio management strategy wherein the composition of different assets that have first been established keeping in mind an investor’s risk profile, are adjusted occasionally so that superior risk-adjusted returns can be generated when market conditions are favourable. This provides investors with an opportunity to enhance their returns by taking advantage of certain market scenarios.

Tactical asset allocation, however is different from portfolio rebalancing – while the latter focuses on making changes to reflect the strategic allocation formula in the portfolio, in the case of the former the weightages of different assets are changed in a deviation from the strategic allocation so as to reap benefits from short-term opportunities and when those opportunities pass over, the allocation is reversed to the strategic one so that investors stay on course with their long-term investment objectives.

Dynamic asset allocation strategy is also an active allocation strategy but this entails continuous changes to the asset allocation mix in accordance with market conditions as opposed to the tactical asset allocation strategy where the shifts are more sporadic. Typically movements are made in response to macro trends in the stock market and the economy and the emphasis in this strategy tends to be a reduction in allocations of assets that are underperforming and channeling them into assets that are performing well. For instance, if equities are exhibiting downward trends, a portfolio manager may sell off equity holdings and gravitate towards low-risk assets to mitigate risks and when equities bounce back, he/she may switch back to an equity-heavy portfolio.

The success of dynamic asset allocation strategy depends on the portfolio manager making good investment decisions at the right time. Active adjustment of portfolio allocations can be time consuming and is not recommended for those who do not have investment expertise or have only a superficial knowledge of market dynamics. Frequent buying and selling of assets can also increase transaction costs for the investor.

According to CRISIL Research, an analysis of SIP investment of Rs 10,000 over the past five years in aggressive hybrid funds versus dynamic asset allocation funds shows that investment of Rs 6 lakh rupees over the period in the former would have grown to Rs 8.65 lakh at 14.6% XIRR versus Rs 7.88 lakh in the latter at 10.9% XIRR. Strategic asset allocation through SIPs works on the principle of buying and holding and is better suited in the long run. One of the biggest advantages of sticking to the SIP route and maintaining a static mix is that you can maintain a disciplined approach to investments and you will be able to invest in all phases of the market cycles. This allows you to reap the benefit of rupee cost averaging and in the long run the impact of the market troughs get evened out. Since investments through SIPs take place at regular intervals, they remain independent of market movements and this significantly reduces the chances of erroneous stemming from greed or fear.

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