Hybrid funds provide the much-needed diversification to the investor by investing in different asset classes. Keep reading to find out more about these types of mutual funds, and why should you include them in your portfolio.
Hybrid mutual funds are a type of mutual funds that invest in a mix of asset classes such as equity and debt. Unlike a pure equity fund or a pure debt fund that may be focussed on a particular asset class, hybrid funds invest in equity stocks and debt securities or bonds in varying proportions as per the objectives of the fund.
Based on the proportion of investment in particular assets, they can be classified as:
Equity-oriented Hybrid Fund - At least 65% of the funds are allocated to equity and quity-related instruments.
Debt-oriented Hybrid Fund: These funds maintain less than 65% equity exposure at any time.
There is also a third type of hybrid funds which is known as Arbitrage funds. These funds primarily focus on increasing profitability through momentous buying and selling of investment instruments in different markets.
Almost all mutual funds are essentially hybrid funds unless 100% of the asset allocation is into equity or debts. There are various advantages of these funds over a pure equity fund or a pure debt fund. Here are some of the benefits.
Allows the Investor to Balance Risk and Return: One of the best benefits of a hybrid fund is that enables the investor to balance the risk-reward ratio of their investment portfolio by selecting an appropriate type of hybrid fund. For instance, investors can choose an equity-oriented hybrid fund or aggressive hybrid fund that maintains high equity exposure. While this would have high-return potential, it would also add to the risk level of the portfolio. On the other hand, investors can choose debt-oriented funds or conservative fund to increase debt exposure so as to lower the risk level.
Good for Both Bull and Bear Market: When the market enters a bull phase, hybrid funds can take advantage of their equity exposure to generate alpha for the investor. On the other hand, when the market enters the bearish phase, debt exposure of the fund can help in generating steady returns.
Apt for New Investors: Hybrid Mutual Funds are best suited for new investors that wish to generate healthy returns by investing in equity but also need a good safety net provided by the debt investments of a fund.
2-in-1 Fund: With the help of a hybrid fund, investors can maintain healthy equity and debt exposure without having to invest and manage two funds such as pure equity funds and debt fund separately.
Gives Fund Manager the Flexibility: Hybrid funds make it easy for the fund manager to invest the funds collected as per the set objectives of the fund. Depending on the market conditions, fund managers can slightly increase or decrease the equity and debt exposure to ensure the interest of the investor is not compromised.
While hybrid funds are considered to be extremely beneficial, they too have certain limitations. They can be restricting for the fund manager at times, especially in times of volatile market conditions. Since the equity and debt exposure percentage cannot be altered beyond a point, a fund manager has to allocate funds as per the set exposure. While this acts in favour of the investors most of the times, it can also be a limiting factor at times.
Hybrid mutual funds provide you with the much-needed safeguard on your investments. Keeping in mind the dynamic nature of the market, these funds are frequently resorted to by the investors for long-term return generation. Invest in Hybrid funds today and make the most out of the best available investment opportunity. However, make sure you select a mutual fund carefully by looking at its past track record and knowing the risks associated with it.