An investor’s life is full of choices and decisions. Where to invest money? When to buy or sell? What’s the best class of investment? For how long to hold the investment? etc. etc.
While making these decisions, there is often a lingering fear of missing out on what didn’t make the cut.
Let’s say you planned to invest ₹10,000 monthly in a mutual fund. After much deliberation, you finally decide that equity funds are the best fit for you. But it’s likely that you’ll continue to ponder what it would be like to engage in other funds.
You can beat this FOMO with the help of Hybrid mutual funds!
What are Hybrid Mutual Funds?
Hybrid mutual funds are a type of investment tool that combine elements of both equity and debt assets. These funds are designed to provide investors with a diversified portfolio that aims to achieve the best of both worlds: the potential for higher returns from equities and the stability of fixed-income investments.
Types of Hybrid mutual funds
There are different types of hybrid mutual funds, each with its investment objective, portfolio composition and risk profile. Here are the four main categories of hybrid mutual funds:
- Conservative hybrid funds
These funds invest 75%-90% of the total allocation in debt securities such as bonds and government securities.The rest of the money is invested in equities. The aim of these funds is to provide regular income to investors while preserving their capital. Conservative hybrid funds are suitable for investors with a low-risk tolerance and a short investment horizon.
- Balanced hybrid funds
As the name suggests, these funds are pretty balanced in money allocation. Usually, they invest both in debt and equity related instruments varying between 40%-60%. The equity component of the portfolio provides potential for money to grow, while the debt component provides stability and income. Balanced hybrid funds are suitable for investors who seek moderate risk and returns.
- Aggressive hybrid funds
SEBI norms mandate these funds to invest 65-80% in stocks and 20-35% in debt instruments. These funds aim to provide high returns by investing in a diversified portfolio of stocks across different sectors and companies with varying market capitalisations. Aggressive hybrid funds are suitable for investors who have a high-risk tolerance and a long investment horizon.
- Multi-asset allocation funds
Unlike other hybrid funds, these funds predominantly invest in three asset classes-
equity, debt and one other like gold and real estate. As a rule, they must have a minimum of 10% in each asset class. One big benefit is that these funds aim to provide diversification across different asset classes and geographies. The dynamic asset allocation strategy helps in managing risk better. Multi-asset allocation funds are suitable for investors who seek a well-diversified portfolio and are willing to tolerate moderate to high risk.
- Equity savings funds
These funds balance the risk and returns by investing in equity, debt and derivatives. With the inclusion of derivatives, the directional equity exposure is reduced. It reduces the volatility risk and generates a stable return. The equity component provides growth and debt and derivatives ensure regular stable returns. These schemes invest minimum 65% in equities instruments and minimum 10% in debt instruments. The remaining is used in derivatives for hedging purposes which is mentioned in the scheme information.
- Arbitrage funds
These funds generate returns by buying in the cash market and using derivatives instruments to generate returns through price difference in both the markets. However, the risk quotient is significantly less because there is no directional call on the stock. Under arbitrage funds, they invest a minimum 65% in equity and equity related instruments.This fund is suitable for low-risk investors.
When investing in hybrid mutual funds, it's essential to evaluate the fund's performance, expense ratio, portfolio composition, and risk profile, among other factors. Investors should also consider their investment goals, risk tolerance and horizon before selecting a hybrid mutual fund.
In conclusion, hybrid mutual funds offer investors a convenient and diversified way to invest in both equity and debt securities. The different categories of hybrid mutual funds provide investors with a range of investment options, depending on their risk profile and objectives. However, it's essential to conduct due diligence and seek professional advice before investing in hybrid mutual funds.
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