Know the different types of hybrid mutual funds

When you want to invest in mutual fund and balance both risks and return, you can consider investing in hybrid funds. Before you plan to invest in it, let’s take a look at the different types of hybrid mutual funds. Keeping reading to know more.

Getting started with types of mutual fund:

When it comes to mutual fund investment, you can invest in any of the three categories, including equity, debt or hybrid fund.

  • Equity funds: This type of funds is the riskiest as they invest in stocks of the companies to generate high returns.

  • Debt funds: This fund invests in treasury bills, fixed income securities. Debt fund comprises of fixed maturity plans, liquid funds, gilt funds, short-term plans, monthly income, and so on.

  • Hybrid fund: This includes a mix of equity and debt mutual funds to lower risk and achieve diversification in an investment portfolio. If you’re looking for long-term investment, you can build wealth corpus, while short-term investors can earn regular income via a balanced portfolio.

Those who have a high-risk tolerance level prefer to go for equity funds , while those who are conservative investors with low-risk appetite opt for debt funds. However, some investors want a mix of both equity and debt instruments; hence they choose to invest in the hybrid fund.

Under the hybrid fund, fund house invests 65%-75% in equity shares and the remaining in debt mutual funds. If you’re looking for an investment avenue that offers higher returns and is less risky, this is an ideal choice for you. Before knowing the hybrid fund types, take a look at the advantages:

Advantages of hybrid fund:

  • A hybrid mutual fund is suitable for a budding investor as they can get exposure to equity funds.

  • Investors can start investing small amounts monthly through Systematic Investment Plan (SIP)

  • The presence of equity component in Hybrid fund can lead to high volatility, but debt fund stabilizes volatility factor to offer steady returns to investors

  • The expense ratio for the fund is low

  • There is a balance of risk and returns elements as equity funds earn better profits and debt funds ensure stable returns at a lower risk.

Types of hybrid funds:

According to the Securities and Exchange Board of India (SEBI), there are six types of hybrid funds, these include:

  • Aggressive hybrid fund: The fund invests primarily in equity and a small portion in debt funds money market instruments. Moderate risk investor with a medium investment horizon, who are looking to generate regular income along with wealth creation can invest in the aggressive hybrid fund.

  • Balanced Hybrid Fund: This type of fund invests 65% in equity and equity-related instruments and the rest in debt and cash derivatives. The balanced hybrid fund comprising of fixed income securities makes the equity investments less volatile.

  • Conservative Hybrid Funds: The Conservative fund allocates 65% of assets in fixed deposit like instruments for regular income generation, while 25% of asset investment in stocks. This type of fund is ideal for risk-averse investors with 2-3 years of the investment horizon.

  • Dynamic Asset Allocation: This type of fund invests in a combination of stocks and fixed deposit like financial instruments. Fund managers keep changing the asset allocation based on the market triggers to generate stable returns. Dynamic asset allocation is suitable for investors with a short-term investment horizon.

  • Arbitrage Fund and Equity Savings: Under this, there is an investment of asset allocation in equity, arbitrage and debt funds. Fund managers invest around 65% of assets primarily in equity, including arbitrage funds and the remaining 10% in debt funds.

  • Multi-asset funds: This class of hybrid fund invest in more than two assets. Multi-asset allocation funds allow investors to invest in the extra asset class. Investors must invest a minimum of 10% in each asset class, as per the SEBI regulations.

While selecting a hybrid fund, you need to analyze various factors and choose the one that suits you. Remember to think about your risk tolerance, investment time period and your financial goal before you plan to invest.