Investors in mutual funds can be divided into three types. One group is individuals willing to take a risk and invest in equity funds. Second, those who want to be safe by investing in debt funds provide some returns while keeping their money safe, and finally, those who wish for the best of both worlds by investing in hybrid funds.
What are Hybrid Funds?
Mutual funds that deal in more than one asset class are hybrid mutual funds. They are typically a mix of equity and debt assets, but they could include gold or even housing.
Asset allocation is one of the main ideas underpinning hybrid funds. Asset allocation is selecting how to distribute wealth among multiple asset classes, whereas correlation refers to the co-movement of asset returns, and diversification refers to having over one asset in a portfolio.
Investment options within an asset class tend to have a high return correlation since the sources of risk and factors impacting returns are comparable. Still, investment options across types of investments have less correlation in returns.
Types of Hybrid Funds
Multi-Asset Allocation Fund: These schemes must invest in at least three asset classes, with a minimum of 10{b5e7a034cf7578d727fe83dad3185e82b959d3b5c5b02d2cea7a998dfb1aaa76} in each asset class. These funds allow clients to invest in a broader range of asset classes, with asset allocation determined by the fund manager’s opinion.
Balanced Hybrid Fund: These funds invest a minimum of 40{b5e7a034cf7578d727fe83dad3185e82b959d3b5c5b02d2cea7a998dfb1aaa76} and a maximum of 60{b5e7a034cf7578d727fe83dad3185e82b959d3b5c5b02d2cea7a998dfb1aaa76} of their assets in equities and debt. The goal is to achieve a long-term capital growth through equities asset allocation while balancing risk through debt allocation. Arbitrage is prohibited in this type of arrangement.
Conservative Hybrid Funds: These funds must invest between 10{b5e7a034cf7578d727fe83dad3185e82b959d3b5c5b02d2cea7a998dfb1aaa76} and 25{b5e7a034cf7578d727fe83dad3185e82b959d3b5c5b02d2cea7a998dfb1aaa76} of their total assets in equities and equity-related products. The other 75 to 90{b5e7a034cf7578d727fe83dad3185e82b959d3b5c5b02d2cea7a998dfb1aaa76} will be invested in debt securities. The goal of these funds is to produce income from the loan portion of the portfolio while boosting the overall return with the tiny equity component. It’s a fantastic alternative for folks who want to pay off debt while also taking on a little added risk.
Aggressive Hybrid Funds: These funds must invest a minimum of 65 per cent in the equity investment market and a maximum of 80 per cent in the debt asset class. They offer the opportunity of large profits with a bit of risk due to the low debt allocation. They pay for the tax treatment that equity-oriented schemes receive.
Benefits of Hybrid Funds
Returns: Returns on hybrid funds are not guaranteed. The Net Asset Value (NAV) of such funds is affected by the performance of the underlying securities. As a result, market fluctuations may cause it to vary. Furthermore, during market downturns, these companies may not declare dividends.
Costs: Hybrid funds would charge an expense ratio for managing your portfolio. Before investing in such a hybrid fund, ensure it has a lower expense ratio than competing funds, as this equates to higher investor take-home profits.
Investment Strategy: It’s vital to remember that fund managers choose the asset mix, asset allocations, and investment strategy. Investors have no control over how the different components are selected or blended.
Time Horizon: Hybrid funds are best for investors with a medium-term time horizon of 3-5 years. The larger the duration, the more likely you will achieve consistently greater profits.
Financial Goals: With hybrid funds, you can achieve medium financial goals like buying a car or supporting higher education. To augment their post-retirement income, retirees also invest in balanced funds and choose the dividend option.
Bottom Line
Hybrid mutual funds may be the ideal option for you if you want to choose your funds but desire the convenience of a single investment that offers you a completely diversified portfolio. However, because hybrid funds come in various shapes and sizes, it’s critical to understand the type you’re investing in and the fund’s strategy in terms of your financial goals, risk appetite, and time horizon. A financial advisor can assist you in selecting appropriate hybrid funds that fit your investment profile.
