Hybrid funds

Hybrid funds

Hybrid funds are a type of mutual fund that uses diversification in two or more asset classes as a strategic approach. These mutual funds invest in a combination of equity, debt and other products, hence they are also sometimes called asset allocation funds. Since hybrid funds invest in a mix of assets, it offers Indian investors a diversified portfolio which some investors and experts may consider as an optimal portfolio allocation approach. These funds aspire to strike a balance between risk and reward by aiming to generate income in the short term and achieve capital appreciation in the long term hence via this mutual fund you have the ability to invest in a combination of multiple asset classes via a single fund. Hybrid mutual funds have schemes for different levels of risk tolerance ranging from conservative to moderate, to moderately high and aggressive.

Hybrid mutual funds invest in both equities and debt securities concurrently along with other asset classes like gold that provides an inflationary hedge and reduces volatility.  Hybrid funds are comparatively more stable with respect to equity mutual funds since they invest in other asset classes, like debt and gold etc. Therefore, the portfolio may produce higher returns in the long term through the equity component while trying to contain the portfolio volatility through the debt, gold allocation in the mutual fund. A hybrid mutual fund manager creates a portfolio based on the investment objective of the type of mutual fund scheme and allocates the funds in equity and debt instruments in different percentages. The mutual fund manager also purchases or sells securities depending on the current trend in the stock market located in Mumbai India.

Hybrid mutual funds provide automatic rebalancing of assets with an attempt to ensure that the asset allocation of your investments do not deviate from the targeted asset allocation as mandated by the scheme due to stock market changes. Hybrid funds that follow asset allocation rules; rebalancing the portfolio on a regular basis have provided good returns and may be an effective method for realizing a mutual fund investor’s financial goals. Hybrid funds auto rebalance their portfolio as per the scheme investing limits based on the prevailing market conditions. For example, in a bull market, if the equity allocation moves up from its set limit then the mutual fund manager will sell a part of the equity portfolio and buy some debt, thus automatically booking gains. Hybrid funds offer a basket of asset allocation solutions for various investment needs and risk appetites via different types of funds which help Indian investors achieving their financial goals based on an optimal asset allocation and risk tolerance.

Conservative investors can invest in hybrid funds which have a higher debt component; also aggressive investors can invest in hybrid funds with higher equity components. Dynamic asset allocation funds are a hybrid type of mutual funds which are also known as Balanced advantage funds, these are a type of mutual schemes which manage the fund portfolio asset allocation dynamically and are quite popular nowadays amongst India investors especially in Mumbai. Most of these types of mutual funds increase their equity allocation and reduce debt allocation when valuations of equity markets are low and vice versa. These mutual funds make an attempt at both income creation and capital appreciation, while minimising downside risk in volatile markets through allocations in the assets such as debt, and gold.

The table below illustrates the hybrid mutual funds choices based on different types of investors risk tolerance.

Hybrid Fund CategoryEquity PercentageDebt PercentageRisk
Aggressive Hybrid Fund65 to 80%20 to 35%Very high
Balanced Hybrid Fund40 to 60%40 to 60%Moderately high
Conservative Hybrid Fund10 to 25%75 to 90%Moderate
Dynamic Asset Allocation Fund / Balanced Advantage FundNo LimitNo LimitHigh
Multi-Asset Allocation FundAt least 10% in each asset class such as  (equity, debt, gold, real estate)At least 10% in each asset class such as (equity, debt, gold)High to Very high
Equity Savings Fund65% minimum but can be hedged with derivatives10% minimumModerate high
Arbitrage FundsUp to 65%Up to 35% in debtLow to Moderate

Hybrid funds offer a range of funds to meet investors various long term, short term investments needs and goals. Hybrid mutual fund investments may be considered relatively safer than equity only mutual funds since they invest in multiple assets like, equity, debt and gold etc. The presence of equities (shares) in the portfolio provides the potential to earn higher returns while debt and gold may provide risk reduction during stock market volatility and crashes. Investors can also decide to invest in hybrid mutual funds through systematic investment plans ( SIPs ). Hybrid mutual funds are suitable for first time Indian investors who have never been exposed to the volatility of the stock markets located in Mumbai India.

The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice or recommendations for types of balanced advantage mutual fund schemes. This material is not an offer, solicitation or recommendation to purchase any financial products or services or Hybrid mutual funds. Always remember that all investments, including Hybrid fund investments carry some level of risk, including the potential loss of principal invested.