What are Hybrid Mutual Funds? Definition, Types and Benefits

Key Highlights

• Hybrid mutual funds are a unique type of mutual fund that invests in various asset classes. These include stocks, fixed-income securities, and even real estate or gold.

• Types of hybrid funds include Multi Asset Allocation Funds, Aggressive Hybrid Funds, Balanced Advantage Funds, Conservative Hybrid Funds, Equity Savings Funds, and Arbitrage Funds.

• Hybrid mutual funds are suitable for investors who like low-risk investments with higher returns than debt funds. They are also good for individuals who have longer investment horizons.

• Hybrid funds provide access to different asset classes with a single fund. Active risk management and portfolio diversification are the greatest benefits. So, they are suitable for different risk profiles.

What is a Hybrid Mutual Fund?

Hybrid mutual funds are a unique type of mutual fund that invests in several asset classes. In other words, they combine many different types of funds. They include stocks and fixed-income securities like bonds, debentures, treasury bills, etc. Hybrid funds are a combination of the three main asset classes – equity, fixed income, and commodities.

How do Hybrid Funds Work?

Hybrid funds try to generate profits in the short term. In the long term, It focuses on capital appreciation with a balanced portfolio. Based on the fund's investment goal, fund managers distribute your money across equities and debt in different proportions. The fund manager may trade securities in order to profit from changes in the market.

Types of Hybrid Funds

The following are the different types of hybrid mutual funds.

• Multi Asset Allocation Fund: These schemes must invest in at least three different asset classes. Each class should have a minimum investment of 10% investment. These funds offer investors exposure to a wide range of asset classes. The fund manager determines the asset allocation.

• Aggressive Hybrid Funds: These investment plans have to allocate at least 20-35% to the debt asset class and 65-80% to the equity asset class. Lesser allocation to the debt class offers an opportunity for significant profits at lower risk. They also take advantage of the taxation policy of equity-oriented funds.

• Balanced Advantage Funds or Dynamic Asset Allocation: Asset allocation in dynamic investment funds can vary from a 100% debt to a 100% equity asset class. The fund's financial model serves as the recommended foundation for determining asset allocation. Investors who wish to automate their asset allocation might consider these funds.

• Conservative Hybrid Funds: These funds must allocate between 10-25% of their entire assets to stocks and securities linked to stocks. Debt instruments constitute the remaining 75 to 90 percent. These funds seek to increase returns by generating earnings from the debt component and a very small portion of equity. This is a good investment option if you're ready to take a bit more risk.

• Equity Savings Funds: These funds use debt, equity, and derivatives investments to try to balance risk and return. Derivatives lower volatility and help generate steady returns. In addition, the equity assets offer growth. These funds allocate 0-35% of their investments to debt asset classes and 65-100% to equity assets.

• Arbitrage Fund: The arbitrage strategy tries to take profits from the difference in prices between two markets. It involves purchasing in the cash market and selling in the futures market. Derivative instruments are used in this strategy. Since there is a simultaneous purchase and sell, it results in consistent returns similar to debt.

Who Should Invest in Hybrid Mutual Funds?

The following investors can invest in hybrid mutual funds.

• Hybrid funds are a good option for conservative investors looking for low-risk investment opportunities. They usually give higher returns than debt funds.
• Some new investors want a significant amount of equity exposure throughout their whole portfolio without assuming significant risk. Hybrid funds are an excellent investment alternative for such investors.
• Hybrid funds are appropriate for individuals with longer investment horizons since they include a sizable exposure to stocks.

Benefits of Hybrid Mutual Funds

Now that you know what hybrid mutual funds mean, let’s look at their advantages. They include the following:

• It allows investors to access different asset classes through a single fund. This eliminates the need for multiple investments.

• Hybrid mutual funds are fundamentally based on active risk management. They diversify their portfolio by investing in non-related asset classes like debt and equity.

• One of the most important advantages of hybrid mutual funds is portfolio diversification. They diversify not only among various asset classes but also among their subclasses. For instance, they may invest in different types of stocks, like value or growth stocks, large-cap, mid-cap, or small-cap stocks.

• Hybrid mutual funds combine elements of both aggressive and moderate investing and appeal to different risk profiles.

Things to Consider Before Investing in Hybrid Mutual Funds

You should consider the following factors while investing in hybrid funds.

1. Financial Objectives: Investors must have a clear understanding of their financial objectives and how a fund would help to meet them. An investor should only invest in a fund if the expected profits can help fulfil his financial goals.

2. Risk Appetite: You should not think of hybrid funds as entirely risk-free. There is risk associated with any financial instrument that invests in equity markets. It might not be as risky as stocks or equity funds. However, you still need to be careful and regularly rebalance your portfolio.

3. Investment Horizon: Hybrid funds are a type of fund for investors with a medium or long-term investment horizon. Their historical performance shows they are quite good for long-term investments. If one invests for a long period of time, he will also profit from the power of compounding.

4. Expense Ratio of the Fund: The cost an asset management company charges you annually to manage your assets is known as the expense ratio. It is a particular percentage of the profits from your investments. You should pick funds with a low-cost ratio. A high ratio lowers your net asset value (NAV). This decreases your effective payout at the time of redemption.

Conclusion

Hybrid mutual funds invest in different types of asset classes. There are many types of hybrid mutual funds. These include equity funds, multi-asset allocation arbitrage funds, balanced advantage funds, etc. They help with portfolio diversification. In addition, hybrid mutual funds actively manage risk by investing in non-related securities. So, they are a good choice for investors willing to take low or moderate risks. However, investors should carefully consider their investment horizon, financial goals, and risk tolerance before investing in hybrid mutual funds.