Balancing risk and reward: A hybrid approach to retirement savings

I'm 42 years old and have a moderate investment approach. I aim to build a diversified portfolio with hybrid funds, focusing on balanced advantage funds (BAFs) or multi-asset funds (MAFs). 

The variety of hybrid funds and their strategies makes selection confusing: conservative funds have lower equity exposure but are taxed at a 30% slab rate, while equity-oriented funds offer higher equity and risk but are tax-efficient. 

With 18 years to retirement, a 10% annual return expectation, and a focus on downside protection over tax savings, could you suggest suitable hybrid funds? How many should I include in my portfolio, and which structure best aligns with my goals?

—Vikas Shah

Considering your moderate risk appetite as mentioned in your query, your preference towards protecting the downside is natural and we completely understand it. Considering you have 18 years to retirement, which is long-term from all perspectives, you can consider a combination of BAFs and aggressive hybrid funds to generate better risk-adjusted return for your portfolio. 

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BAFs or dynamic asset allocation funds will help you to restrict the exposure to any particular asset class and the fund manager will be able to navigate through different market cycles. 

Whereas aggressive hybrid funds will help you have reasonable allocation in equity from a growth perspective as your investment horizon is close to 18 years. You can avoid conservative hybrid funds, as they can be useful for medium-duration time horizons. 

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Equity MFs

While you have mentioned your preference for investing in hybrid funds, we would like to suggest you rethink this, and consider having an allocation in equity mutual funds, too. This suggestion to invest in equity funds is purely from the time horizon of your investment. The risk on equity-based investments reduces as your investment horizon increases. 

There are multiple data points that can help to establish this view and the possibility of making a loss on diversified equity investment through mutual funds over 7 years of holding is extremely rare. 

To begin with, you can keep around 75% allocation in hybrid funds and 25% in equity funds. Once your confidence and comfort increase, you can consider increasing the equity allocation over a period. 

Also Read: Multi asset allocation is the way to go: Union AMC's Madhu Nair

Overall 6-10 funds across all categories are good enough to build your portfolio. If you plan to invest in equity funds then you can initially consider large-, mid- and flexicap funds.

Harshad Chetanwala, co-founder, MyWealthGrowth.com