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Hybrid Funds & You

Hybrid Funds & You

Hybrid fund is a category that is characterized by funds that invest among two or more asset classes. These funds generally invest in a mix of stock, bonds and commodities. Read on to know if these are suitable for investment


Mutual funds offer a wide variety of schemes in order to meet the needs and goals of investors. Investors willing to invest in equity can invest in equity-oriented schemes, investors with lower risk appetite go for debt funds and those investors who want to track the index can invest in index funds, etc. Now the question that arises is what if any investor wants to invest in a single fund and wants to take exposure to both equity and debt? The answer to this question is hybrid funds. Hybrid fund is a category that is characterized by funds that invest among two or more asset classes. These funds generally invest in a mix of stock, bonds and commodities. Recently, there has been upsurge in net inflows and the AUM of hybrid schemes in this year. The following table shows the increase in net inflow and AUM as compared to equity-oriented and total AUM of all the schemes since the last six months.

As can be seen from the above table and chart, there has been a steady increase in net inflow into hybrid funds as well as AUM of hybrid funds as a percentage of the total AUM of domestic mutual funds. Except for the month of May 2021, there is a decrease in net inflow from the month of April but it has again bounced back in the month of June by 98.82 per cent. One of the reasons for such a rise in inflows is the sharp rise in the equity market. This has led to stretched valuations and hence investors are not very confident of investing in equity funds directly and are hence investing in hybrid funds based on their risk appetite.

Therefore, on an average these funds, year till date, have attracted more inflows than equity dedicated mutual funds. There are various types of hybrid funds depending upon the exposure they are allowed to take in different asset classes in different proportions. This makes it difficult for an investor to select the right kind of hybrid fund. In the following paragraphs we will take you through the different types of hybrid funds and how suitable they are for investments.

Now, here is an important question: Which type of investor should invest in which sub-category of a hybrid fund? Hybrid funds are safer funds as compared to equity funds but riskier than debt funds. These funds deliver higher returns as com-pared to debt funds as investment in hybrid funds comprise some proportion of equity and equity related instruments. The blend of equity and debt instruments offers investors stable returns. In case equity markets aren’t doing well due to volatility in the market then the debt component of the fund will provide a cushion against volatile equity markets and arrest the losses.

1. Conservative Hybrid Funds : This. fund is ideal for investors who have low risk appetite and follow a conservative method of investing. Preferably, risk-averse investors and people who are retired or near the age of retiring invest in this fund. As it comprises a small proportion of equity it delivers higher return as compared pure debt funds or fixed deposits. It is ideal for investors with at least 2 to 3 years investment horizon.

2a. Balanced Hybrid Funds : Balanced funds have the balanced exposure of both equity as well as debt instruments. This is ideal for investors who are looking for balanced portfolio consisting of both instruments and have investment horizon of at least three years.

2b. Aggressive Hybrid Funds : Investors who are seeking to involve in the growth potential of equity markets and want small amount of exposure in debt instruments in order to prevent the portfolio from volatility should consider investing in these funds. They are ideal for moderate risk-taking investors with investment horizon of at least three years.

3. Dynamic Asset Allocation or Balanced Advantage Funds : These are ideal for investors seeking a diversified portfolio and higher returns than debt or fixed income instruments. Fund managers allocate the funds dynamically depending on market conditions and this helps investors to earn better risk-adjusted returns. Investors should at least have three years’ investment horizon.

4. Multi Asset Allocation Fund : This type of fund is suitable for investors who are not willing to take higher risk but seek consistent and stable returns on their investment. The fund manager invests in at least three asset classes which offer diversification to their investors. Generally, these three asset classes are equity, debt and gold. Investors should at least have an investment horizon of three years.

5. Arbitrage Funds : This fund is suitable for vigilant investors who want to take advantage of volatility of the market without taking too much risk. They are less risky than equity markets as fund managers know the buying price and the selling price. They are ideal for an investment horizon of 1-3 years.

6. Equity Savings Fund : Equity savings schemes are suitable for conservative investors. This fund consists of equity, arbitrage and debt instruments which means it offers benefits of all three asset classes by investing in a single fund. It is suitable for investors with investment horizon of at least 2-3 years. Equity is volatile in nature but debt and arbitrage acts as cushion to minimize the volatility and losses.

To conclude, hybrid funds offer higher returns as compared to fixed income instruments and pure debt instruments. We have discussed different sub-categories of hybrid funds which might seem similar but they do vary by the way they are operated. Investors should assess their needs, goals, investment horizon and risk appetite before investing in any of the funds. If they match with any particular fund then they can consider investing in that particular fund.

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