Hybrid Funds

After learning about Debt Funds and their stability, Ravi and Priya realised that balancing risk and returns is critical to building a diversified portfolio.

Ravi wonders if there’s a way to achieve higher growth potential without taking on the entire risk of equities, while Priya prefers to keep some stability in her investments.

This leads them to explore Hybrid Funds, which blend equity and debt to offer a balanced approach that suits their needs.

The concept of hybrid funds denotes diversification. They balance their books between equities and debt to optimise risk and return. While equities have a very high return but with higher risks, debt is much more stable and yields low returns. Aggregately, these two can provide a less risky portfolio than an equity fund but yield higher returns than a pure debt fund.

There are various kinds of hybrid funds, each with a different amount of risk and return. The three major categories include balanced funds, aggressive hybrid funds, and conservative hybrid funds. The primary difference between them lies in the share of equity and debt each holds. Balanced funds generally invest 60% in equities and 40% in debt. They strike a very good balance between growth and stability, which is ideal for investors with moderate risk tolerance.

Aggressive hybrid funds, the name suggests, are invested higher in stocks, up to 75 or 80 per cent. They have a higher risk with greater growth possible. Suitable for investors willing and able to take high risks in search of higher returns over the long term. On the other hand, conservative hybrid funds, as the mirror image, have a bigger component in debt and a smaller one in equity. Being more stable, these funds provide an option for investors who prefer a lower risk with more predictable returns.

One of the advantages of hybrid funds is that they’re managed by professional fund managers who adjust the equity-debt mix based on market conditions. So, if the stock market is doing well, the manager might increase the equity exposure. If markets are volatile, they may shift to more debt to protect your investment. This adaptability can assist you in managing risk and return to meet your investment objectives.

The ease of investing in hybrid funds is another advantage. Selecting individual stocks and bonds is not required. All you have to do is monitor the overall performance; the fund manager handles the allocation. It’s a great option if you’re a beginner or don’t have the time or expertise to manage your portfolio.

However, like all investments, hybrid funds come with their own set of risks. The fund's value depends on the performance of both the equity and debt markets. If the stock market falls, the fund's equity portion can drag down the returns. If interest rates rise, the value of the debt portion might go down. While hybrid funds are less volatile than pure equity funds, they’re still subject to market fluctuations.

When investing in hybrid funds, the expense ratio should also be considered. Since these funds manage debt and equity, their expense ratios are typically higher than those of pure equity or debt funds. Despite the potential slight increase in fees, the professional management and convenience may make them worthwhile.

When choosing a hybrid fund, consider your investment goals, risk tolerance, and time horizon. A balanced fund might be a good fit if you’re looking for a balanced approach with moderate risk. An aggressive hybrid fund might be better if you’re okay with taking on more risk for higher potential returns. And if you prefer stability, a conservative hybrid fund could be the way to go.

Conclusion:

As Ravi and Priya discover the versatility of Hybrid Funds, they see how these investments can combine growth and stability, making them an excellent choice for many investors. However, they are also intrigued by broadening their horizons further. In the next chapter, we’ll explore international funds, which allow you to invest in global markets and diversify your portfolio beyond domestic boundaries.