Mutual funds are considered awesome financial instruments to invest our wealth and make it grow. Money invested in mutual funds is managed by expert managers, taking away the hassle of doing it ourselves. But let’s admit it, choosing the right kind of fund can be confusing for many investors, right?
Today, we’ll dig into the world of hybrid mutual funds. So, what exactly are they all about?
Hybrid Funds are mutual fund schemes that aim to minimise risk and diversify the portfolio by investing in a mix of debt, equity, gold and other asset classes. They have more potential to generate better wealth than debt funds, also less risky than equity funds. The risk and return of the fund depend on the allocation to equity securities in the portfolio. Remember, higher allocation to equity means higher risk.
When considering hybrid funds, there are various types categorized by asset allocation. It is important for investors to select a hybrid fund based on risk tolerance, investment timeframe, and financial goals. The following are some types of hybrid funds:
Aggressive Hybrid Fund: These funds fall in the group of open-ended schemes that primarily invest in stocks and equity-related products. They also allocate a part of their assets towards debt and money market instruments. These funds involve higher risks due to their emphasis on aggressive stock investments.
Conservative Hybrid Fund: These funds are open-ended schemes that invest largely in debt instruments, often allocating 75% to 90% of their assets to fixed-income securities. The remaining is allocated to stocks and equity products. These funds are more stable than aggressive hybrid funds, making them suitable for low-risk investors.
Also Read: How to report tax on gains from Equity Mutual Funds in Income Tax Return for AY 2023-24
Fund for Dynamic Asset Allocation: As the name implies, These funds invest in both stocks and debt funds based on current market circumstances as an internal investment strategy. Long-term investors seeking superior risk-adjusted returns regardless of market circumstances might consider this fund.
Fund for Arbitrage: Arbitrage funds, as the name implies, attempt to exploit the ‘One Price Rule.’ They benefit from price differences between two marketplaces, often the cash and futures markets. These funds buy equities for cash and then sell them in the futures market. Arbitrage funds invest at least 65% of their gross assets in equities and the remaining in debt and money market instruments on a strategic basis.
| Type of Hybrid Fund | Asset Allocation | Risk | Suitability |
| Aggressive Hybrid Fund | 65-80% equity, 20-35% debt | High | Investors who can tolerate high risk and want the potential for high returns |
| Conservative Hybrid Fund | 75-90% debt, 10-25% equity | Low | Investors who want to minimize risk and seek steady income |
| Dynamic Asset Allocation Fund | Varies, but typically 60-80% equity | Medium | Investors who want to balance risk and return |
| Multi-Asset Allocation Fund | Minimum of 10% in 3 asset classes, typically equity, debt and gold | Medium | Investors who want to diversify their investments across asset classes |
| Arbitrage Fund | 65% equity, 35% debt | Low | Investors who want to profit from short-term price differences between markets |
| Equity Savings Fund | Debt, Equity and arbitrage opportunities in cash and derivative segment of equity market | Medium | Investors who want to generate income and grow their wealth over the long term |
Who should invest?
Hybrid mutual funds are investment funds that combine different asset classes, such as stocks and bonds, within a single portfolio. They are considered suitable for both new investors entering into the mutual fund market and those with medium-term investment horizons.
According to Dr Narasimhulu Siddula, Assistant Professor at the National Institute of Securities Markets (NISM), hybrid mutual funds offer good returns, ranging from 12% to 20%. They provide better returns than debt funds. However, the risk and returns of hybrid funds are contingent upon the level of equity exposure embraced within the portfolio. As the allocation to equity increases, so does the magnitude of risk.
Also Read: 5 SIPs that made good fortune for equity mutual fund investors
Dr Siddula further says that Conservative hybrid funds are the best option for retired employees. However, he also says that before making any investment, it’s always advisable to take advice from a SEBI- registered financial advisor.
The main advantage of hybrid funds is that they provide diversification benefits to investors. As of 31st May 2023, there were approximately 140 hybrid schemes available in the market.
This article has been written by Nimmagadda Deeraj, an intern with FE PF Desk.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.