Since I am not receiving any return from liquid funds, should I start investing in hybrid funds?
Liquid funds are generally used by investors to park their emergency corpus and / or their short-term cash flow needs. Safety and liquidity are the primary concern for investors, while yields take a back seat. Hybrid funds offer some exposure to equities, which typically outperform most asset classes over the long term. However, stocks are more volatile than most asset classes with even the possibility of short-term capital loss.
The extent of a hybrid fund’s equity exposure depends on the category to which it belongs. Investors can choose between conservative hybrid funds (the equity allocation can be 10-25%) and aggressive hybrid funds (65% -80%). In addition, exposure to fixed income securities differs from that of liquid funds presenting a duration, credit and liquidity risk for the investor. Therefore, the risk / return profile of hybrid funds is significantly different from that of liquid funds. Evaluate the suitability of the fund in relation to your risk appetite, your investment horizon and your integration into the overall portfolio.
I have been investing in a SIP for four years. While I don’t need the money now, do I have to buy back some of the gains, in case the markets go down?
Equities are more volatile than most asset classes with even the possibility of short-term capital loss. However, as the holding period increases, the risk of capital loss decreases. You should keep investing if you have a long investment horizon, and may even look to allocate more when corrections take place, as they provide an opportunity to buy shares at lower prices. Over the longer term, equities tend to outperform most asset classes.
Investors should stick to their long-term strategic asset allocation, based on their risk appetite, and not try to synchronize the markets. You may want to consider rebalancing your asset allocation towards target weights if there is a significant drift due to market movements. The withdrawal of any corpus would reduce the value of your portfolio to the extent of the amount withdrawn and you could lose any subsequent gains on the corpus withdrawn that would have accumulated until the end of your investment horizon.
The author is Director, Investment Advisory, Morningstar Investment Adviser (India). Send your questions to [email protected]