There are numerous categories in the investment line like equity, debt, and hybrid. High risk-taking investors invest mostly in equities. Investors who are looking for regular income but take less risk than equity investors invest mostly in debt. And investors looking for the best of both worlds can go for the hybrid funds. 

Now, before making any investment decision, it’s important to know certain things like your risk profile, the list of financial goals you want to meet, the investment period you want to invest for, etc. Once you have figured that out, it’s a good base to finalize the investment avenue. 

In case, if you are apprehensive about which asset class to choose between equity and debt, hybrid funds can be considered as they offer a mix of equity and debt. In this blog, we’ll help you understand a bit deeper about hybrid funds, their types, and how to pick them in detail. 

What Are Hybrid Funds?

Mutual funds are divided into three types: equity, debt, and hybrid. While equity offers higher returns than other asset classes, debt offers comparatively safer returns in the form of regular steady income. Finally, hybrid – they offer a mix of both in terms of risk and returns. Hybrid funds invest in a mix of asset classes like equity and debt to add diversification to a portfolio and minimize the overall risk. With equities, they can generate higher returns and the debt component adds security to the portfolio.

Some of the reasons why investors should choose hybrid funds over other funds are that they deliver diversification, have less impact on the returns during market volatility, offer better returns than debt funds, etc. Besides, these funds are less risky compared to pure equity funds as well. Not only do these funds balance your risk and return portfolio but also aid in building up your wealth in the long run. Moreover, investing in hybrid funds creates the opportunity to invest in diverse asset classes across markets. Whether you are a conservative or an aggressive investor, hybrid funds fit the bill.

Types of Hybrid Funds

So far, you have learned the basics of hybrid funds, now, it’s time to know their types as well. Hybrid funds are classified into seven types namely arbitrage funds, balanced funds, dynamic asset allocation funds or balanced advantage funds, conservative funds, aggressive funds, multi-asset allocation funds, and equity savings funds. 

Well, only knowing the types won’t take you anywhere, so, let’s understand each of these funds in depth for better understanding.

Arbitrage Hybrid Funds: These funds invest in both debt and money market securities. 

Fund managers use the arbitrage approach by buying securities in one market at a low price and selling them in another market where the price is high to capture the profit. 

Fund managers are constantly looking for such opportunities to attain substantial gains for investors. Arbitrage funds by and large, produce affirmative and steady returns. According to the SEBI guidelines, in an Arbitrage Hybrid Fund, 65% of the funds go into equities, while the rest are put into debt. If you are a short-term investor looking to gain swift returns in no time, these funds should be on your investment go-to list.

Balanced Hybrid Funds: This is another type of hybrid fund that invests 40 to 60 percent of the funds in equity and debt securities. In simple words, the investment range can be either 40% going into equity and the rest into debt or vice-versa. And sometimes, it’s somewhere in between. If you are an investor with moderate risk-taking capability, then, these funds are for you.                

Balanced Advantage Hybrid Funds: These funds invest in both equity and debt but not in a fixed ratio. Fund managers manage the allocation between equity and debt in a dynamic way based on the market conditions. If the equity market is performing well, the fund manager puts more of the investor’s funds in equity and the rest in debt, or vice-versa. The fund manager keeps on switching the funds as per the market conditions and returns generated on the investment. 

Long story short, where there’s more gain, there you witness high exposure. The majority of the balanced advantage funds go with 65-80% into equities. Sometimes, equity investments take a spike when the fund managers anticipate that the markets will rise. On the flip side, fund managers may sell your securities and switch to the debt market if they anticipate a nose-diving market and considerable losses.

Conservative Hybrid Funds: These funds mostly invest in debt securities. They do invest in equity as well but the composition ranges from anywhere between 10 to 25 percent. The rest 75 to 90 percent of the funds go into debt allocation. Investment in conservative hybrid funds is ideal for risk-averse investors. Also, this asset class is good for investors who are looking for capital safety and want to diversify a small portion into equity as well.

Multi Asset Allocation Funds: The allocation of investments in this fund comprises equity, debt, and other securities like gold, commodities, etc. These funds are suitable for investors with a low-risk appetite looking for stable returns.

Aggressive Hybrid Funds: These mutual funds majorly invest in equities or equity-related schemes. The asset allocation for these funds range between 65%-80% in equity and the rest in debt or liquid securities. Even when the market falls, the debt or liquid investment covers up the losses caused by equity. 

Since equity investments carry high risk, investors with aggressive risk appetites can put their money into these funds. Also, long-term investors with an investment holding capacity of 5 years or more can invest in these funds.

Equity Savings Funds: As the name suggests, nearly, 65-90% of the funds go into equity and equity-related assets. And at least 10% should go into debt to secure the investors from market volatility. Since the equity component is dominating here, investors are going to get somewhat moderate to high returns. Debt, along with the arbitrage element, acts as a cushion for investors during market swings. If you are a moderate risk-taking investor, these funds are your catch.

Advantages of Hybrid Mutual Funds

Diversification of portfolio: One clear advantage of Hybrid funds is that with one fund you can invest in multiple asset classes. This helps in creating a balanced portfolio with a single investment.

Risk Management: Another benefit of Hybrid funds is the built-in cushion of debt investments that provides stability to a portfolio during market downsides. Since the hybrid fund’s asset allocation can be changed by the fund manager given the condition, this flexibility becomes a handy risk management mechanism.

How to Pick a Hybrid Fund?

Hybrid funds are ideal for all types of investors as there are different funds for varying risk profiles. If you are a high-risk taker, you can opt for aggressive hybrid funds or equity savings funds. Investors seeking to capture swift returns in a short period can go for arbitrage funds. If capital safety is your top priority, then conservative hybrid funds fulfill your objective. All these funds provide diversification to your existing portfolio. 

Fund managers shuffle these funds according to the market changes. Most of the investments in hybrid funds majorly concentrate on equity but the risk linked to this asset class is predominantly high compared to others. However, the debt exposure attached to these funds along with equity provides flexibility for the investor to invest, thereby curtailing the financial risk.

Final Words

Before you take the final call on whether to invest in hybrid funds or not, there are certain factors you need to keep in mind as an investor. 

Some of them include risk-reward ratio, investment time period, previous returns, tax on capital gains, investment goal, etc. Whether you are a short-term investor or a long-term investor with an aggressive approach, mixed components of equity and debt in hybrid funds bring a balance to your prevailing portfolio.

If you too are also looking to invest in hybrid Mutual Funds then Freecharge is a great place to begin. Freecharge offers you Top rated Mutual funds from India’s biggest AMCs. You can start investing with a SIP of as low as Rs 500. The Investing process is fast, Easy and 100% paperless. Don’t forget to check that out.

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