Navigating Volatility: Exposure Guide To Hybrid, Multi Cap, And Debt Funds

India's benchmark stock indices, NSE Nifty 50 and BSE Sensex, closed at their lowest levels in over a month on Monday. The Nifty 50 settled 309.00 points, after the index fell as much as 2.01% during the day, to 23,816.15.

Amid market volatility, investors need to ensure that their strategy aligns with their goals, horizon and risk appetite. Based on these, investors can take their calls to buy the dip, rebalance their portfolio or simply stay invested.

One of the few methods to bring stability is to spread investments across various asset classes and categories. Additionally, investors need to ensure that they adopt strategy that is unique to the category they have invested in.

"A lot of clients want to add funds while the markets fell," said Salonee Sanghvi, founder of My Wealth Guide. Essentially, irrespective of market activity, one can build their portfolio based on their risk and reward profile.

Financial advisors suggest investors need to construct their portfolio for better stability amid turbulent times. Here is how.

Hybrid funds invest in a mix of assets like debt, equity and commodities like gold. These funds allow investors to gain equity exposure along with other asset classes.

"They earn higher returns than debts and navigate the market volatility," said Sanghvi. These funds earn higher returns than debt funds and would work best if held for three to five years.

At present markets have seen volatility, owing to US election results and uncertain global cues.

"Having a bit of fixed income is good as valuations are not so cheap. A mixed portfolio will work," said Santosh Joseph, founder of Germinate Investment Services. The hybrid funds which have fixed income exposure and equity have a beneficial tax structure, making them attractive for some investors.

He recommends a 60:40 equity to debt ratio, with a staggered approach to equity over three to six months.

Debt funds mostly work best for conservative investors, income seekers and short-term investors, according to Sanghvi.

"Wouldn’t recommend adding debt funds only because of expectation of correction," she said. One can also consider the possibility of higher returns on these debt funds if the RBI is to cut interest rates.

Debt funds, according to Santosh, work well when positioned to be held for a couple of years.

Recent sell off by foreign institutional investors has impacted large-cap funds more than small- and mid-cap funds. Advisors recommend that investments into this category be made via SIP or STP rather than in lumpsums.

Stick to asset allocation and redeem if proportion of SMID is higher. The 10-year rolling returns for SMID cap funds since 2005 stands at 16-18%. One needs to hold these for more than seven years, said Sanghvi.

"No need to reduce existing SIPs, since it is the best route but continue for long horizon," said Joseph. One should not simply chase returns or funds only due to recency bias in performance.

A multicap is required to invest a minimum of 25% in large-caps, 25% in mid-caps and 25% in small-caps.

"It could depend on risk appetite. A flexi cap fund might be a better option due to flexibility," said Sanghvi. She notes that this aggressive allocation may not suit everyone. Flexi cap funds may be a better option to balances volatility and minimise downside risk, she added.

This is possibly the best diversified equity category for long term, according to Joseph. One can have balanced exposure with static investments into large, small and midcap funds.

"Only category with a minimum to maintain. I would choose multi-cap slightly over flexi cap too. Missing out on small and mid cap would not be an issue with this fund," added Joseph. He also noted that these funds are ideal funds for long term investors.