Balancing Risk and Reward: A Hybrid Approach to Retirement Savings

Given your moderate risk appetite, as stated in your question, your preference to protect the downside is natural and we fully understand that. Since you have 18 years left until retirement, which is long term from all perspectives, you may want to consider a combination of BAFs and aggressive hybrid funds to generate better risk-adjusted returns for your portfolio.

BAFs or dynamic asset allocation funds help you limit exposure to a particular asset class and the fund manager can navigate different market cycles.

While aggressive hybrid funds will help you achieve a reasonable allocation to equities from a growth perspective as your investment horizon is almost 18 years. You can avoid conservative hybrid funds as they can be useful for a medium time horizon.

Equity MFs

Although you have indicated your preference for investing in hybrid funds, we would recommend that you reconsider this and also consider an allocation to equity funds. This suggestion to invest in equity funds comes purely from the time horizon of your investment. The risk of equity-based investments decreases as your investment horizon lengthens.

There are multiple data points that can help establish this view, and the opportunity to make a loss on diversified stock investments through mutual funds over a seven-year period is extremely rare.

To start with, you can keep about 75% of investments in hybrid funds and 25% in equity funds. Once your confidence and comfort has increased, you can consider increasing the stock allocation over time.

In total, 6 to 10 funds across all categories are good enough to build your portfolio. If you are planning to invest in equity funds, you can initially consider large, mid-cap and flexi-cap funds.

Harshad Chetanwala, co-founder of MyWealthGrowth.com