​​How to select hybrid funds for a short-term investment strategy?

Mutual fund investors are broadly categorised into three types. Firstly, those who can take some risk and opt for equity mutual funds. Secondly, those who want to play safe and invest in debt mutual funds to avail assured returns and capital protection features. Thirdly, those who want to avail the best of both opt for the hybrid mutual funds. Read on to know all about hybrid funds and how you can choose the best hybrid fund scheme to meet your short or mid-term goals.

What is a hybrid mutual fund?

A hybrid mutual fund invests in both equity and debt instruments to avoid concentration risk and achieve diversification benefits. A blend of these two instruments has the potential to generate higher returns than debt mutual funds and is less risky than equity mutual funds. Your decision to invest in a hybrid mutual fund must be based on your investment objective and risk preference level.

How does a hybrid mutual fund function?

Hybrid mutual funds aim to attain wealth appreciation over the long term and yield stable income over the short term through a balanced investment portfolio. Fund manager puts your funds in differing proportions in debt and equity instruments depending on the fund’s objective. Also, the fund manager might sell or purchase securities of hybrid funds to make the most out of the market movements.

Why should you choose hybrid mutual funds for your mid- or short-term goals?

  • Investing in hybrid mutual funds provides you with exposure to both i.e., debt and equity. Equity instruments in a hybrid fund offer you wealth creation features while debt instruments in a hybrid fund offer stability in returns and capital preservation features.
  • Mix of debt and equity instruments even provides diversification benefits to your investments.
  • Hybrid mutual fund is best suited for those who are looking to enter the equity market but want to face lower volatility. The presence of debt constituents in hybrid funds reduces volatility and offers stability.

What are the parameters you must consider when investing in a hybrid fund?

While there are various benefits linked with hybrid fund investing, there are a few parameters you must consider for making an informed decision. Read on to know –

  • Degree of risk

The hybrid fund’s degree of risk is aligned with its asset allocation strategy. Thus, by going through the asset allocation strategy of the fund scheme, you can understand the scheme’s composition. For instance, by reviewing the scheme’s SID (Scheme Information Document) or KIM (Key Information Memorandum), you can understand the kind of stock the scheme is investing in i.e., whether large, small, or mid-cap, etc. Having an idea about where the scheme is investing allows you to understand the risk involved and the returns you may expect.

  • Financial goals

Before investing, ensure to review your goals and their horizon. If you do not want to take any risk, then ensure to stick with debt-concentrated hybrid funds to meet your short-term goals. If you can take higher risks for your mid-term investment horizon, then you may go for equity-concentrated hybrid funds.

Ending note

A hybrid fund is a kind of mutual fund that puts your money in multiple asset classes, where asset allocation, diversification and risk tolerance are the key philosophies. Hybrid funds are a prudent option to yield capital returns through debt allocation and balanced equity. With such funds, you can reach your short-term and mid-term goals faster as they lower volatility by investing in debt constituents, which in turn reduces the involvement of risk arising from equity markets.