Hybrid funds are ones that combine two or more asset types. These funds are primarily based on two asset classes: equities and debt. In hybrid funds, there are nearly seven sub-categories, and a majority of them appear to be identical. However, in reality, these are not same since the investing method these funds use is quite different. As a result, this article will assist you in understanding the many sub-categories of hybrid funds and will also help you to pick the best among them.
Balanced hybrid funds
According to the Securities and Exchange Board of India (SEBI), balanced funds should invest at least 40 per cent of their assets in either debt or equity. The fund's minimum allocation of 40 per cent to equity and debt instruments ensure that the risk-reward ratio remains stable.
This fund is better suited for investors with a somewhat conservative risk profile, as it will fit their risk-return profile.
Multi-asset allocation funds
These funds are allowed to invest in a variety of asset classes, while SEBI regulations require that they should invest in a minimum of three asset classes. Furthermore, the fund should allocate at least ten per cent of its assets to each of these three asset groups. This fund provides the benefit of diversification since it invests across multiple asset classes.
This product is suitable for individuals seeking diversification and who have a moderately conservative to moderate risk profile.
Aggressive hybrid funds
The name of the fund itself tells you all you need to know about it. According to the SEBI definition, an aggressive hybrid fund should invest at least 65 per cent of its assets in stocks. However, investments in equities is subject to a cap of 80 per cent. Accordingly, not more than 80 per cent of the fund's assets can be invested in shares. Fixed-income securities, which invest in a variety of debt and money market instruments, provide the remaining component of the asset allocation.
This fund is better suited for individuals with a moderate risk tolerance, particularly the first-time investors who want to gain experience investing in stock markets.
Dynamic asset allocation funds
Dynamic asset allocation fund, also known as balanced advantage fund, is a fund that has no constraints on how it allocates assets between equity and debt. Depending on the market conditions, the fund can adjust its asset allocation from 100 per cent stocks to 100 per cent debt.
This fund is suitable for investors with a moderate to moderately aggressive risk tolerance level.
Conservative hybrid funds
Conservative hybrid funds are those funds having a goal to safeguard capital. while generating some growth through a minor investment in equities. According to SEBI guidelines, the equity exposure of these funds should be between 10 per cent and 25 per cent, with the remainder of the assets allocated to debt and money market instruments.
These funds are suitable for people who want to generate long-term returns that are higher than bank fixed deposits. These funds are better suited for more conservative investors.
Equity savings fund
Equity savings funds strive to achieve the ideal mix of debt securities, derivatives, and stocks. The goal of these funds is to ensure that market volatility has no substantial influence on the fund's performance. According to SEBI regulations, these funds must allocate at least 65 per cent of their assets to equities and equity-related instruments, with the balance portion of their assets allocated to debt securities. Having stated that, these funds must specify the minimum hedged and unhedged portion in the scheme information document (SID).
These funds are suitable for investors who have high risk appetite and cannot resist market volatility.
Arbitrage funds are those that use the arbitrage technique, in which the fund buys assets in one market and sells in another, with the price difference between the two markets being the arbitrage profit. During times of increasing volatility, these funds gain money. According to SEBI, these funds must invest at least 65 per cent of their assets in equities and equity-related products. As a result, when there are arbitrage possibilities and lower interest rates, it is prudent to invest in debt and money market instruments. Furthermore, for tax purposes, these funds are classified as equity funds.
These funds are suitable for persons in the highest income tax bracket with a three-month to one-year investment horizon.