What are hybrid mutual funds?

What are Hybrid Mutual Funds

Hybrid mutual funds are mutual fund schemes that combine equity, debt, and other asset classes to achieve the scheme's investment objective. To reduce risk, these mutual funds frequently invest in a mix of different asset classes. In comparison to equity funds, hybrid funds can be relatively stable option and can provide relatively higher returns than debt funds over long term.

By investing in a mix of stocks and fixed-income instruments like bonds and treasury bills, these funds give investors a diversified portfolio. Combining risk management with a reasonable return potential is the primary goal of hybrid mutual funds.

How does a hybrid fund work?

A hybrid fund can offer a diversified investment portfolio, while also reducing the overall risk. Depending upon the scheme’s investment objective, the funds are allocated in a combination of equity and debt markets in varying proportions. Investors can expect relatively steady returns and potential capital appreciation if invested for a longer time horizon. In addition, under favorable market conditions, fund managers may also buy or sell assets to generate better returns

What is hybrid fund meaning, and how does it work? The short answer is that these funds give investors a variety of options for combining different asset classes to help them reach their financial objectives. Before selecting a particular kind of hybrid fund, it is critical to evaluate your risk appetite and investing goals.

Types of hybrid funds?

●Aggressive Hybrid funds - In an aggressive hybrid scheme, between 65% to 80% of funds are allocated to equity and equity-related securities while 20% to 35% is allocated to debt securities.
●Balanced Hybrid funds – Investment in equity & equity related instruments and debt instruments will be around 40% to 60%.
●Conservative Hybrid funds - Investment in Equity & equity related instruments will be between 10% and 25% while in debt instruments it will be between 75% to 90%.
●Dynamic asset allocation or balanced advantage – Investment in equity and debt will be managed dynamically.
●Multi Asset Allocation – Investment will be in at least three asset classes with minimum allocation of 10% in all three asset classes.

* A Fund House can offer either Aggressive Hybrid Fund or Balanced Hybrid but not both

Benefits of hybrid funds

●Diversification - Your investment portfolio's risk can be reduced by diversifying it across a variety of asset classes with hybrid funds.
●Better Risk Management - From moderate to aggressive risk tolerance schemes, hybrid funds provide a variety of equity and debt combinations in varying proportions.
●Access multiple asset classes - You can access multiple asset classes with a single hybrid fund, instead of investing in different funds.

Factors to consider before investing in hybrid mutual funds in India

Before investing in hybrid mutual funds in India, Investors should consider the following important factors:
●Risk Assessment - Hybrid funds have their own set of risk factors, especially depending on the amount of equity in the scheme. The more equity component in the fund, the riskier it is.
●Returns - Returns in a hybrid fund are primarily determined by how well the scheme's equity component performs. Equity-oriented funds may offer higher returns than debt-oriented funds, depending on how the equity market performs. However, the impact may be higher in case of a market correction.
●Investment time horizon - To strike a balance between equity and debt funds, hybrid funds can be a preferred option for investors with medium-term investment horizons. However, with a longer investment horizon, investors can anticipate better chances of receiving higher returns that could be relatively stable.
●Investment Schemes - Although hybrid funds come in different types of combinations, proportions, and investment strategies that are pre-determined by fund managers, it is of paramount importance that you pick the right hybrid scheme to match your risk tolerance, financial objective, and investment horizon.

Who should invest in a hybrid mutual fund?

A hybrid mutual fund can serve as a good starting point for investors looking to build their investment portfolio. It can offer better returns opportunity as compared to debt funds & carries less risk as compared to pure equity funds, thanks to its moderate risk-to-return ratio. Investors can also consider investing in hybrid mutual funds to diversify their portfolios.

Now that you know what is a hybrid fund, you can consider investing in these types of funds to diversify your investment portfolio. It will help in mitigating the impact on capital while providing you the possibility of relatively reasonable returns.

Conclusion

Hybrid mutual funds help in the diversification of investment portfolio and reduce overall risk. However, before investing in a hybrid fund, investors should carefully assess their risk tolerance, investment goals, and time horizon. It is also advisable to seek the help of a financial advisor before making any investment-related decision.

FAQs

Is it good to invest in hybrid mutual funds?

Yes, it can be a good idea to invest in hybrid mutual funds. This is because hybrid funds can offer a diverse investment portfolio for investors with moderate risk and can also help in getting comparatively better returns than debt funds.

What is an example of hybrid funds?

Hybrid funds are offered in different types depending on the proportion of the asset classes, such as conservative hybrid funds, balanced hybrid funds, aggressive hybrid funds etc. where some portion is invested in equity securities and the rest in debt securities.

Which type of hybrid fund should I invest in?

Depending on the risk profile and investment objective, hybrid funds offer a variety of schemes to choose from. You can carefully assess all the parameters to choose the most preferred hybrid fund for yourself.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.