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Hybrid funds entail the combination of equity and debt in a single mutual fund portfolio. These hybrid funds can be further sub-categorized into compartments based on whether equity is predominant in this mix or debt is predominant.
Hybrid funds or balanced funds come in different combinations of equity and debt. Equity and debt funds represent two extremes of the investment spectrum. The actual needs of investors lie somewhere in between. The answer in most cases is to buy equity and debt funds in the required proportion. But that is easier said than done. It calls for retail investors to understand and evaluate equity funds and debt funds in detail so as to make an informed decision. A mid-way solution could be the Hybrid funds or Hybrid Funds. These funds combine equity and debt either in pre-determined proportions or in dynamic proportions and then offer it as a readymade product for the investors. As an investor you have a wide choice before you with hybrid funds.
Hybrid funds are also popularly known as balanced funds. Like any hybrid product, they offer a mix of equity and debt. There also hybrid funds that offer a mix of equity and equity futures as in the case of arbitrage funds. Hybrid funds can either be passive or active in terms of allocation. For example, the Hybrid fund can decide on a broad allocation of 80:20 in favour of equities and just maintain that ratio by rebalancing. That is passive allocation. Another option is to keep changing the mix based on the view of the fund manager. The Fund manager can increase the proportion of equities when markets are undervalued or increase the proportion of debt when the interest rates are likely to go down. While these are good on paper, they tend to give a lot of discretion to the fund manager and makes them less objective as hybrid products.
Balanced Mutual Funds or hybrid funds invest in different combinations of equity and debt. The mix is determined in advance at a broad level and then it is marketed as an equity hybrid fund or as an MIP Hybrid. The hybrid fund does the job of asset allocation on behalf of the investor. Instead of you making the decision of how much to allocate to equity and how much to debt, the hybrid fund creates an acceptable formula for you to mix equity and debt. When you mix equity and debt on your own, you do not get the added benefit of professional fund management and professional asset selection. Leading Hybrid funds have given returns of between 11-15% over a 10-year period. In short, hybrid funds have the potential to give higher returns than debt funds and only marginally lower returns compared to equity funds.
There are two ways of classifying the hybrid funds. Hybrid funds can either be classified on the basis of the asset mix or on the basis of the discretion available to the fund manager. Let us first look at hybrid fund categories from the point of view of the asset mix.
Hybrid funds can also be classified based on the discretion to the fund manager on asset allocation.
An aggressive investor wanting little bit of stability can opt for hybrid funds. Similarly, if you are a conservative investor looking to get that little bit extra via equity exposure, then MIPs or monthly income plans could be the product for you. That is how these hybrid funds or hybrid funds combine equity and debt in different proportions to create customized products for investors. Hybrid or balanced funds do the job of asset allocation on your behalf. They offer you the added benefit of professional fund management and professional asset selection as well as in-built diversification benefits. And the returns can be quite attractive. Hybrid equity Funds have given returns of between 11-15% over a 10-year period depending on the equity exposure and the market performance.
What do we understand by hybrid mutual funds or balanced funds in the Indian context? We all understand equity funds and debt funds in plain vanilla terms. But when equity and debt are combined into a single portfolio (balanced or hybrid fund), it combines the security and regularity of debt with the long term wealth creation potential of equity. One of the major merits of hybrid funds is that it combines the best features of equity and debt and enhances the risk-adjusted returns for the investor. With hybrid funds you can have the cake and eat it too. Let us look at who should invest in the different types of hybrid funds.
Essentially hybrid funds are about getting your investment mix right both ways. It is all about getting the stability of debt and the wealth creation potential of equities. The best hybrid funds have managed to mix aggression with stability in their asset mix. A lot of the success of hybrid funds also lies in how well you lay out your philosophy based on the undertone of the market. You need to position the hybrid funds in the right slot. Here is what you must consider before investing in hybrid funds:
A hybrid fund basically combines the best features of equity and debt and saves the investor the challenge of allocation. Instead of going through the allocation process, the investor can directly select a hybrid fund with a certain mix and move towards goals. Broadly, there are 3 key benefits of opting for hybrid funds.
Any asset class, be it equity or debt has risk associated with it. For example equities have market risk, company risk, macro risk and industry risk while debt funds have interest rate risk, default risk and inflation risk. When you evaluate the performance of any fund, it has to be seen in terms of risk adjusted returns. Let us take an illustration. Should you prefer an equity fund giving 15% returns with 20% volatility or a fund that gives 17% returns with 50% volatility? Obviously, the first fund is better when the returns are adjusted for risk. Hybrid funds have risks that encompass equity risk, debt risk and the allocation or diversification risk. Here are 4 ways to look at risk adjustment of returns.