Understanding Hybrid Mutual Funds: A Complete Guide

Introduction

Hybrid mutual fund schemes have made a comeback, marking the investment value over Rs 1.45 lakh crore in 2023-24. Interesting, isn’t it?

Thanks to the benefits they offer of both equity and debt investments in a single fund, hybrid mutual funds are certainly regaining increased popularity. Let’s get to know them better!

How Hybrid Funds Work?

A hybrid mutual fund blends investments in equities, represented by stocks, and debt instruments, such as bonds, within a single portfolio. The allocation between these asset classes is determined by the fund's investment goals and current market conditions, managed by a professional money manager. 

This group combines equities and debts, providing diversification to investors and giving them a lower level of volatility than that exposed if they are investing only in equities.

Benefits of Hybrid Funds

These funds come with some key benefits for investors. Below listed are some of the most significant ones:

1. Balanced Portfolio

Hybrid funds offer an investment opportunity to create a properly balanced portfolio by way of exposure to the equity markets and also the debt markets in a single investment. This will help manage risks and generate stable returns in the medium to long run.

2. Risk Management

The debt component in hybrid funds acts as a cushion that helps to reduce overall portfolio volatility compared with pure equity funds. This is what makes hybrid funds suitable, especially for investors with a moderate risk appetite.

3. Requirement of Diverse Risk Appetites

Hybrid funds can cater to different types of investors—those conservative, stability-seeking, and aggressive in search of returns. As noted earlier, hybrid funds come in three varieties: aggressive, balanced, and conservative, making it possible for an investor to have a choice of one depending on his risk tolerance. 

4. Regular Income Generation

Some of the hybrid funds have the objective of generating regular income for investors through their debt portfolio and, thus, are most suited for those seeking a regular stream of returns. 

Types of Hybrid Mutual Funds

As far as India is concerned, there are broadly the following types of hybrid mutual funds:

1. Conservative Hybrid Fund

1. Equity Allocation: 10% to 25%
2. Debt Allocation: 75% to 90%
3. Primarily invests in debt instruments such as bonds and fixed-income securities, aiming to provide stable returns with lower risk. Suitable for investors seeking regular income and modest capital appreciation.

2. Balanced Hybrid Fund

1. Equity Allocation: 40% to 60%
2. Debt Allocation: 40% to 60%
3. Maintains a balanced mix of equity and debt investments to achieve stability with moderate growth potential. Designed for investors looking for steady returns over the medium to long term.

3. Aggressive Hybrid Fund

1. Equity Allocation: 65% to 80%
2. Debt Allocation: 20% to 35%
3. Allocates a significant portion to equities and equity-related instruments, suitable for investors willing to take higher risks for potentially higher returns. Aims to capitalize on equity market opportunities while providing some stability through debt investments.

4. Dynamic Asset Allocation or Balanced Advantage Fund

1. Equity Allocation: 0% to 100%
2. Debt Allocation: 0% to 100%
3. Adjusts asset allocation dynamically based on market conditions to optimize returns. Offers flexibility by actively managing exposure to equity and debt, aiming to deliver optimal returns across varying market scenarios.

5. Multi-Asset Allocation Fund

1. Minimum Allocation: 10% in each asset class
2. Invests across diverse asset classes including equity, debt, commodities, and potentially international securities. Aims to reduce risk and enhance returns through broad diversification, catering to investors seeking exposure across multiple investment avenues.

6. Arbitrage Fund

1. Equity Allocation: Minimum 65%
2. Exploits price differentials in equity and derivatives markets to generate low-risk returns. Focuses on arbitrage opportunities to capitalize on market inefficiencies, offering stable returns with lower volatility compared to pure equity funds.

7. Equity Savings Fund

1. Equity Allocation: Minimum 65%
2. Derivatives: Minimum (specified for hedging purposes)
3. Invests primarily in equity and equity-related instruments, supplemented by debt and derivatives for hedging. Aims to blend growth potential from equity markets with income stability from debt, suitable for investors seeking a balanced approach to risk and return.

Choosing The Right Hybrid Fund for You

While choosing your hybrid mutual fund, consider these:

1. Levels of Investment Goals & Risk Tolerance

Determine the nature of the hybrid fund required, based on risk tolerance and investment, as aggressive, balanced, or conservative.

2. Investment Horizon

Hybrid Funds generally suit medium-to-long-term investors with a minimum time horizon of 3-5 years or more. Short-term investors may need help finding the best alternative for themselves.

3. Relative Expense Ratios

Compare different hybrid funds based on their expense ratios so that you get the best value for your money. Mostly, lower expense ratios translate into higher net returns.

4. Analysis of Past Performance

Look at the past performance of hybrid funds with respect to returns, volatility, and consistency to get an idea as to whether the funds will suit your investment requirements.

5. Professional Advice-entries

You will definitely want to speak with an investment advisor who can help you evaluate your goals as an investor and your risk profile and can recommend the best-suited hybrid fund for your requirements.