In today’s world, financial uncertainty is very high. Maintaining portfolios in green is a huge challenge. So, is there any way out? Yes, hybrid funds. These are a mix of equity, debt and commodities. But are they right for someone who dislikes risk? Let’s unpack what hybrid funds do, why conservative investors consider them, how they manage the risk, and who should invest in hybrid funds.
What are hybrid funds?
Hybrid funds are mutual funds that invest in various asset types like equity (stocks), debt (bonds) and, in some cases, commodities like gold and silver with different proportions as per the risk-taking ability of an investor. Instead of putting all money in the stock market or just in fixed income, one can choose the middle ground to balance the risk.
Types of Hybrid Funds
Hybrid funds are broadly classified into the following types depending upon the risk level and asset allocation:
- Conservative Hybrid Funds
It is a low-risk hybrid fund which typically allocates 75-90% to debt and 10-25% to equity. These types of funds are suitable for investors seeking stability with some margin for growth.
- Balanced Hybrid Funds
Balanced hybrid funds have moderate risk with asset allocation of 40-60% to debt and the remaining 40-60% in equity. Investors looking for higher growth than conservative hybrid funds and who can take moderate risk invest in these types of funds.
- Aggressive Hybrid Funds
Asset allocation in aggressive hybrid funds varies between 65-80% in equity and 20-35% in debt. Investors with high risk tolerance and those who want equity-like growth invest in aggressive hybrid funds.
- Dynamic Asset Allocation Funds
These funds are also known as balanced advantage funds. As the name suggests, in these types of funds asset allocation is dynamic, and it is managed by experienced fund managers. The asset allocation varies as per the market conditions. Risk profile is variable in these types of funds.
- Multi-Asset Allocation Funds
In this type of fund, assets were allocated in three or more asset classes like equity, debt and gold. It carries a moderate risk.
How do they manage risk?
Risk management in hybrid funds is done through asset allocation and active rebalancing. The fund manager allocates the funds in equity and debt in different proportions as per the investment objective scheme. For investors aiming to keep risk moderate while capturing some benefit from equity rallies, a hybrid mutual fund with lower equity exposure can be a suitable choice.
Hybrid funds are not risk-free, but one can choose the risk level as per their risk appetite. The equity portion will be affected when the market falls, and the debt side can suffer during interest rate shocks.
Investors must read the policy-related documents carefully to understand fees and tax-related implications.
Why Should You Invest in a Hybrid Fund?
The key benefits which a hybrid fund offers are:
- Balanced Risk and Return: Hybrid funds can provide better returns than pure debt funds. Hybrid funds are considered riskier than debt but safer than equity funds. They offer better returns than debt funds in the long term. Also, investors can select the type of hybrid fund depending on their risk appetite.
- Instant Diversification: An investor can instantly diversify their portfolio by investing in a single hybrid fund. They don’t need to manage individual stocks or bonds.
- Professional Management and Automatic Rebalancing: Fund managers actively decide and adjust the allocation between asset classes depending upon the market conditions. Relieving you as an investor from the efforts.
- Suitable for Various Investor Profiles: Various types of hybrid funds are available in the market. Investors can select the fund type depending on their specific needs and risk-taking ability.
Quick Checklist Before You Invest
Before investing in a hybrid fund, ensure the fund’s characteristics align with your personal financial situation and perform due diligence on the fund itself.
- Define your goal and time horizon.
- Check the fund’s equity/debt split and compare it with your risk appetite.
- Review the fund manager’s track record and how they handled past downturns.
- Look at costs (expense ratio) and historical volatility.
- Verify investment strategy.
- If interested in a specific name, read the scheme information document carefully.
Conclusion
For a risk-averse investor, a hybrid fund can be a smart choice which offers equity market growth but still has the cushioning from debt. These funds are not risk-free, but they provide investors with a balanced middle-ground approach.
There are various fund houses in India, like Aditya Birla Sun Life MF, Nippon India MF, etc., which offer hybrid fund schemes. Investors should choose any of them wisely.
