Some mutual funds like to do many things. They invest in large-cap and mid-cap stocks. They in invest in debt and equity.
I am not big a fan of multi-tasking in the money world. I like financial products that do one thing and do them well.
I can live with multi-cap funds, just about, but hybrid funds and balanced funds are a no-no.
These are funds that have a bit of debt investing mixed in with an equity portfolio. And here is why I am not keen on them:
One of the most important things you can do for your portfolio is to decide on a debt-to-equity ratio. And then try and keep the portfolio close to it.
If I have a balanced fund or a hybrid fund in my portfolio, where do I slot that? Debt or equity? Or do I get into breaking up the portfolio of the fund and then doing the math for my portfolio? Seems like too much work.
Keeping plain-vanilla products in my portfolio helps me have a clear view of what my debt-equity allocation is.
If you have a financial advisor — and I am not talking about a broker who gets paid by the mutual fund — the advisor needs to help you build a solid rules-based portfolio.
If the advisor is putting you into hybrid or balanced funds, you need to ask why. And if there is a good reason for this, I’d be very interested in hearing it.
I can live with multi-cap funds though — these invest in shares of large-cap, mid-cap and small-cap companies. This is not an ideal investment. If you need to lower the risk profile of your portfolio by moving out of all mid- and small-cap stocks, then you will need to get rid of the multi-cap fund entirely. So not a great choice for this reason.
And by the way, mutual funds are not the only place where you will see this multi-tasking. The insurance industry has some of the worst offenders. But that is a story for another day.
The above is not financial advice. Please consult your invest advisor before investing. And do follow our Telegram channel.
