One of the common mistakes committed by investors is that they see the high returns enjoyed by others and decide to invest in the schemes that worked for the latter. But, investments do not work like that. Not every variant of mutual funds is suitable for all kinds of investors. It is largely dependent on the risk appetite of the investor. Once you have opted for an investment scheme, it is also important to note the fact that your mutual fund portfolio is not volatile. To make sure that your portfolio remains stable, you need to rebalance it at regular intervals.
Also, there are some types of mutual funds that can help you stabilise your mutual fund portfolio. Some of the prominent examples of mutual fund schemes that can help you in bringing stability to your investment portfolio are index funds and hybrid funds.
They are mutual fund schemes that are known for imitating the performance of the portfolio of a certain index and for that, these schemes are referred to as index-tied or index-tracked mutual funds. Index funds are known for coming up with a goal. The said goal of these passively managed funds is to concurrently track and match the performance of a popular stock market index. The BSE Sensex and NSE NIFTY 50 are examples of popular stock market indices.
How do Index funds work?
Under this variant of mutual funds, the method of asset allocation followed is the same as that followed by its underlying index. Hence, the income that’s earned from index funds is comparable to that generated by their underlying index. Just like in the case of mutual fund schemes, under an index mutual fund, an investor’s money is pooled-in with that of other investors. When enough money is amassed in the fund, the portfolio manager goes ahead and allocates them to indices such as stocks and bonds. Though the fund manager may or may not choose to allocate funds to every component of an index, the main aim here is to get an appropriate sample of every piece. This action ensures that the index performance can be effectively tracked with time.
Are there any merits associated with index funds?
- Index funds are known for being a stable investment option:
These funds are helpful for investors seeking a stable investment tool. Amongst its major alluring features is that they do not require actions like extensive research and tracking. For instance, you are looking to allocate funds to equities. But simultaneously, you are hesitant about exposing yourself to the risks of equity funds that are actively managed. So, instead of not going ahead with the investment, you can opt for a NIFTY or SENSEX index fund.
- They also come with a broad market exposure:
With the choice of investing funds in an index, you ensure that your money is spread across, i.e., diversified all sectors and stocks. With this action, there is a chance that you can earn income on the larger segment of the market through a single index fund. If you were to decide to invest in the Nifty index fund, you can invest in businesses of different sectors such as pharma and financial services.
These funds are a variant of mutual fund schemes that allocate funds to a combination of stocks and bonds. Moreover, some hybrid funds take a broader asset allocation approach and include other assets such as real estate investment trusts (REITs), gold, and commodities. These funds aim to balance allocations between different asset classes. It is done to diversify the portfolio. Doing so might also result in the reduction of the risk factor for the investors. The fund allocation to debt and equity is generally decided as per your risk appetite, financial goals, and investment horizon.
How do they work?
Hybrid funds come with one aim. It is to generate wealth appreciation in the long run and even accumulate income in the short run with the help of a balanced portfolio. The portfolio manager chooses to allocate your money in varying proportions in equity and debt after checking the investment objective of the fund. Furthermore, the fund manager may also opt to buy or sell securities to take advantage of market movements.
What are the advantages of hybrid funds?
- Hybrid funds are not that volatile:
In contrast to equity funds that are subjected to market volatility, hybrid funds help flexibly manage your investment portfolio in a volatile market. A quick sale through an arbitrage hybrid fund ensures that volatility has no impact on your returns.
- Hybrid funds are known for balancing risks with returns:
Hybrid funds are also known for helping investors in achieving the right balance between risks and returns. They offer the stability of stable asset classes like debts while simultaneously they also provide the returns of asset classes like equities.
Can these two funds help in stabilizing a portfolio?
Yes, hybrid funds and index funds can help stabilise your portfolio. As index funds imitate the performance of a particular index and hybrid funds allocate funds to both equity and debt classes, they help rebalance the portfolio, which results in stability.