Introduction

When considering Mutual Fund investments in equities, individuals often find themselves at a crossroads: should they opt for a Pure Equity-oriented mutual fund or a balanced/hybrid scheme? This decision may impact their investment goals and risk tolerance significantly.

The Appeal of Balanced/Hybrid Funds

Many investors are drawn to balanced or hybrid mutual fund schemes over pure Equity options. This choice, however, can partially contradict the primary objective of equity investing because balanced funds are inherently diversified, investing in both equities and debt. Most individuals find detailed portfolio information too technical to digest. They often choose balanced or hybrid funds under the assumption that these options won’t lose value as much as pure equity funds.

Assessing Mutual Fund Performance

To make an informed decision, it’s crucial to evaluate a mutual fund scheme’s performance in various market scenarios. This assessment can provide a better understanding of the product and help investors gauge its suitability based on their investment needs and risk appetite.

Market Volatility Illustration

For instance, in March 2020, equity markets experienced a sharp downturn, with the Nifty 50 Index plummeting by 32% compared to the month’s initial value. During this period, the Net Asset Values (NAVs) of the top three balanced schemes fell by 23% to 26%. This demonstrates that balanced fund values also decline during market downturns, although to a lesser extent than pure equity portfolios like the Nifty 50 Index.

Bull Markets and Underperformance

Conversely, during bull markets, balanced funds are likely to underperform compared to pure equity-oriented schemes because they are not fully invested in equities. It’s unfair to label them as underperformers by comparing their returns to benchmark indices like the Nifty 50, which represent pure equity portfolios.

Recovery Illustration

Continuing from the previous example, when the Nifty 50 Index recovered by 105% from its March 23, 2020, low, the NAVs of the same three balanced schemes increased by 66% to 90%. This highlights that the value of balanced funds can decline or rise based on market conditions.

Understanding Asset Allocation

Balanced and hybrid schemes typically allocate 40-60% to equities and the rest to debt instruments. Even within equities, they diversify across large-cap, mid-cap, and small-cap stocks, influencing their risk profiles. This diversification explains the wide range of returns observed during market recoveries.

Making the Decision

In deciding between pure equity and balanced/hybrid mutual fund schemes, consider your investment purpose and risk tolerance. If you already invest in corporate or government bonds, a pure equity scheme may make more sense for diversification. However, if you seek diversification between equity and debt, a balanced or hybrid scheme offers a convenient option.

(The views expressed here are personal, and this analysis is for conceptual understanding)