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Should you invest in hybrid funds via SIP for short-term goals?

Posted on 20 Mar 2024
Author: Sayan Sircar

Tags: Behaviour ; Mutual Funds

11 mins read
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This article shows you how different categories of hybrid funds have performed for regular SIP investments for short durations.

Should you invest in hybrid funds via SIP for short-term goals?

This article is a part of our detailed article series on the concept of hybrid mutual funds in India. Ensure you have read the other parts here:

Aggressive hybrid mutual funds: understanding the what, why, when and who

This article discusses mutual funds belonging to the aggressive hybrid category for investors to understand if they should invest in such funds.

A primer on hybrid mutual funds: what are they and when to invest in them

This article talks about the hybrid mutual fund category in India and shows you which ones to invest in as per your goals.

📚 Topics covered:

What are hybrid mutual funds?
Data for SIP and step-up SIP
Rolling SIP returns for hybrid funds vs. recurring deposit
Caveats and takeaways from this analysis
Which goals can be funded via short-term SIP in hybrid funds?

What are hybrid mutual funds?

Hybrid funds offer a mix of multiple asset classes (equity/debt/gold/arbitrage/international stocks) in a single fund. The biggest selling points of a hybrid fund are:

tax-free rebalancing: buys and sells inside a mutual fund does not incur any tax.
emotion-free asset allocation changes: many investors miss out on rebalancing either due to lack of active monitoring, knowledge or fear of taxes
one-stop portfolios for certain goals: for very short-term (less than five years) or very long-term goals (more than 10 years), certain hybrid funds can be considered as a part of a 1-2 fund simple portfolio.

We have discussed about the different types of hybrid funds in detail here: A primer on hybrid mutual funds: what are they and when to invest in them

Given that hybrid funds invest in both equity and debt, and the fund manager rebalances them without tax or any action from the investor, they can be considered for a one-stop portfolio for goals. Given that we do not have a long period of data in the Indian context with many different funds existing. We therefore will consider short-term investment horizons via SIP and see how much wealth has been created historically.

We will present a rolling-returns analysis for both fixed SIP (the same amount being invested throughout) and a step-up SIP (where the amount invested/month is increased every year). We have covered the importance of stepping up your SIP here: What is a step-up SIP and how much more wealth does it create vs. a normal SIP?.

Data for SIP and step-up SIP

We show an analysis, using AMFI end-of-day NAV data

data is for month-ends since 2013 for direct plans
we have calculated for 1Y, 2Y, 3Y, 5Y fixed SIP
we have also calculated for 3Y and 5Y 10% step-up SIP
fund categories considered are: Aggressive Hybrid, Conservative Hybrid, Equity Savings, Dynamic Asset Allocation, Balanced Advantage (BAF) and Arbitrage
all return figures are averages for all the funds in that category and are pre-tax

Average short-term rolling SIP returns for hybrid funds

Average	1Y SIP	2Y SIP	3Y SIP	5Y SIP	3Y SIP (10% step-up)	5Y SIP (10% step-up)
Aggressive Hybrid	16.3%	14.0%	12.9%	12.0%	11.9%	10.5%
Conservative Hybrid	9.8%	9.2%	8.8%	8.1%	8.1%	7.0%
Equity Savings	9.7%	9.1%	8.8%	8.4%	8.1%	7.3%
Dynamic Asset Allocation	9.8%	9.3%	9.2%	9.0%	8.5%	7.8%
Balanced Advantage	13.1%	11.7%	10.9%	10.5%	10.1%	9.1%
Arbitrage	6.6%	6.4%	6.2%	6.0%	5.7%	5.2%

Worst short-term rolling SIP returns for hybrid funds

Worst	1Y SIP	2Y SIP	3Y SIP	5Y SIP	3Y SIP (10% step-up)	5Y SIP (10% step-up)
Aggressive Hybrid	-16.3%	-2.9%	-0.6%	0.0%	-0.6%	0.0%
Conservative Hybrid	-7.3%	0.0%	1.5%	3.9%	1.2%	3.2%
Equity Savings	-14.5%	-4.5%	-1.6%	1.8%	-1.7%	1.2%
Dynamic Asset Allocation	-19.1%	-3.7%	-1.3%	3.1%	-1.4%	2.3%
Balanced Advantage	-21.7%	-2.2%	-0.6%	0.9%	-0.7%	0.4%
Arbitrage	3.4%	3.9%	4.1%	4.8%	3.7%	4.1%

We have deliberately skipped showing maximum returns since that exhibit will present a misleading picture to investors due to anchoring bias.

Short-term rolling SIP risk for hybrid funds

Risk (Std.Dev)	1Y SIP	2Y SIP	3Y SIP	5Y SIP	3Y SIP (10% step-up)	5Y SIP (10% step-up)
Aggressive Hybrid	16.7%	9.9%	6.6%	5.8%	6.2%	5.2%
Conservative Hybrid	6.3%	4.4%	3.5%	3.0%	3.2%	2.6%
Equity Savings	7.2%	4.9%	3.8%	3.3%	3.6%	2.9%
Dynamic Asset Allocation	8.7%	5.4%	4.1%	3.8%	3.9%	3.4%
Balanced Advantage	11.9%	7.1%	5.0%	4.4%	4.6%	3.9%
Arbitrage	2.3%	2.2%	2.1%	2.1%	1.9%	1.8%

Short-term rolling SIP return/risk for hybrid funds

Return/Risk	1Y SIP	2Y SIP	3Y SIP	5Y SIP	3Y SIP (10% step-up)	5Y SIP (10% step-up)
Aggressive Hybrid	0.98	1.41	1.96	2.07	1.93	2.03
Conservative Hybrid	1.55	2.10	2.52	2.73	2.50	2.71
Equity Savings	1.34	1.88	2.29	2.52	2.25	2.48
Dynamic Asset Allocation	1.13	1.73	2.25	2.38	2.21	2.34
Balanced Advantage	1.10	1.65	2.21	2.37	2.18	2.32
Arbitrage	2.82	2.91	2.97	2.82	2.97	2.82

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Rolling SIP returns for hybrid funds vs. recurring deposit

Using a recurring deposit or a “safer” fund type like equity arbitrage is a common choice given to investors looking at short-term goals. We have therefore shown how these funds have performed vs. a post-tax 5% return from a recurring deposit. The table shows the percentage of cases where the hybrid fund has beaten the recurring deposit.

More than FD	1Y SIP	2Y SIP	3Y SIP	5Y SIP	3Y SIP (10% step-up)	5Y SIP (10% step-up)
Aggressive Hybrid	69%	78%	82%	81%	81%	80%
Conservative Hybrid	73%	81%	86%	84%	84%	83%
Equity Savings	70%	79%	82%	82%	80%	78%
Dynamic Asset Allocation	67%	76%	82%	82%	80%	78%
Balanced Advantage	70%	80%	82%	83%	81%	83%
Arbitrage	73%	71%	73%	77%	65%	47%

To understand how to use this data about hybrid funds:

Caveats and takeaways from this analysis

We have captured average and worst returns over a 10-year period. However, the last 10-years has seen a massive bull-run and therefore all return figures are high in general. The only falls are due to the COVID-19 market crash in March 2020.

Generally, drawing any conclusion from such short-term data is not wise. Investors should be careful putting the conclusions in practice.

Which goals can be funded via short-term SIP in hybrid funds?

Once you understand the caveats described above, you will realise that with a bit of prudent risk management, you can use hybrid funds for certain short-term goals:

goals where the end date is flexible: a good example is buying a house or a car. If the market falls just before the purchase date, you can defer the purchase
goals where you can take a loan: goals like house down-payment or college admission can be funded easily with a loan in case the corpus falls short of the target

Ultimately, short-term goals will have to be managed together along with long-term goals like retirement and children’s college education like this.

Calculation of SIP amount for multiple goals

Once you combine all of them together, a tool like the Arthgyaan Goal-based investing calculator, then you can see the asset classes required at a portfolio level.

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