Investments can be categorized into three main types, considering their risk levels: equity, debt, and hybrid fund. Financial advisors typically consider an individual’s financial goals, risk tolerance, and investment timeframe when crafting an investment plan.
Since each person has unique needs and aspirations, it’s challenging to label an investor solely as high-risk or low-risk. This is where Hybrid Mutual Funds come into play.
This article will delve into Hybrid Funds and discuss key important features to understand before investing in them.
What are Hybrid Mutual Funds?
Hybrid funds are a type of mutual fund which can be defined as investment options that merge equity and debt investments with the aim of fulfilling the scheme’s investment objective. Every hybrid fund presents a distinct blend of equity and debt, strategically tailored to cater to diverse investor profiles.
Features of Hybrid Funds
Hybrid funds are suitable for investors seeking a balanced exposure to both equities and debt. Here are some fundamental characteristics of hybrid funds:
- Hybrid fund possesses a diversified portfolio comprising equities, debt, and other assets, enabling investors to access multiple asset categories through a single fund.
- These funds maintain a well-balanced portfolio, leveraging the advantages of both equity and debt asset classes.
- They are attractive for investors desiring stable returns or seeking an alternative to pure equity or debt funds.
- Various types of hybrid funds offer different equity-debt combinations, carefully designed to meet diverse investor profiles’ financial needs and investment goals.
- Optimal results from hybrid fund investments are typically realized when investors hold the units for a minimum of 3 to 5 years.
Classification Of Hybrid Funds
Here are the various kinds of hybrid funds based on the allocation of assets towards debt instruments and equity securities:
- Aggressive Hybrid Funds: This type of mutual fund allocates over sixty-five per cent of the total fund in equity securities and the remaining portion in money market securities and debt instruments. They aim to achieve higher returns while managing risk effectively.
- Conservative Hybrid Funds: Debt-oriented hybrid fund allots over sixty-five per cent of the entire fund in the fixed income debt instruments such as government securities and treasury bonds. The remaining portion is invested in equities, including stocks and shares, with some allocation to cash while others as cash equivalents for liquidity management.
- Balanced Hybrid Funds: These open-ended schemes invest in both debt and equity securities. They typically allocate 40%-60% of the fund to equity and other such related instruments and another 40%-60% to debt instruments. Balanced funds are suitable for investment horizons exceeding three years and are taxed similarly to debt funds.
- Dynamic Asset Allocation: It dynamically adjusts its asset allocation between debt and equity based on market conditions. It aims to book profits during market upswings and increase investments during market corrections. This type of mutual fund is ideal for investment horizons exceeding three years and are taxed as equity funds.
- Multi-Asset Allocation Hybrid Funds: These open-ended schemes invest in several asset classes. They allocate ten per cent of their assets to three different asset classes. Multi-asset allocation funds provide diversification across various asset classes and are suitable for a three-year investment horizon.
- Equity Savings Hybrid Funds: Equity savings schemes invest in debt, arbitrage opportunities and equities in the market. They allocate at least sixty-five per cent of their assets to equities and approximately 10% to debt securities. Moreover, the best investment horizon for this type of mutual fund is two to three years, and they are taxed as equity funds.
- Arbitrage Hybrid Funds: It engages in the simultaneous buying and selling of stocks and shares. They purchase stocks from the cash market at lower prices and sell them at higher prices in future markets, profiting from the difference. Arbitrage funds are comparatively safer than equity-oriented hybrid funds.
Conclusion
Hybrid fund introduces diversity by combining various securities, which results in portfolio diversification and reduces risks. This type of mutual fund can be an excellent choice if you prefer a combination of debt and equity in your investment portfolio. However, it is essential to carefully evaluate and select appropriate funds based on your risk preferences, as different hybrid funds cater to different risk levels.
