Most investors are well versed with the investment terms debt funds and equity funds. However, not many are familiarized with the term hybrid funds or balanced funds. What are hybrid funds? Why are they gaining so much traction in the past few years? What makes hybrid funds so attractive? Let’s understand the answers of these questions through this article.
What is hybrid fund?
Hybrid mutual funds are a type of mutual funds that are an amalgamation of equity and debt mutual funds. In simpler terms, balanced funds provide the features of both equity and debt funds in one single fund. These mutual funds comprise of several components including bond, stock, cash, and often money market instruments in specific proportion. A perfect blend of two essential asset classes – equity and debt, balanced funds aim to offer the best of the both worlds by trying to produce returns similar to equity funds while also trying to reduce the risk as much as possible like debt mutual funds.
Types of hybrid funds:
Hybrid or balance funds are categorized into four main categories, mainly:
- Aggressive hybrid funds
- Conservative hybrid funds
- Arbitrage funds
- Multi asset allocation hybrid funds
- Dynamic asset allocation funds (DAAF) or Balanced advantage hybrid funds
- Equity saving fund
Why are hybrid funds so popular?
The following benefits of hybrid mutual funds make them extremely attractive among retail investors. Let’s understand these advantages:
- Diversification of investment portfolio
One of the biggest benefits of hybrid funds is that you do not have to invest in different types of mutual funds to diversify your investment portfolio. You can simply invest in balanced funds that invest their assets across several asset classes.
- Shield against inflation
Balance or hybrid mutual funds offer hedge against inflation. How, you may wonder? A diversified portfolio not only protects against volatility but also provides hedge against inflation. Since, hybrid funds invest in a mix of equity and debt, they are a good investment option to hedge your portfolio against inflation.
- Freedom to re-balance the composition of the fund
When you invest your money in the market, there are instances when the equity markets are overrated than the debt markets, or vice versa. A fund manager of hybrid funds has the freedom to re-balance the different asset classes within the fund that serves the objective of the investor. This saves investors of the trouble of tracking their mutual fund investments and managing asset allocation strategies on a periodic basis.
- Flexible risk reduction opportunity
Based on an investor’s risk profile, a fund manager can assess the allocation across different types of asset classes within a hybrid fund. Basis on your risk profile, you can choose among different types of hybrid funds that suit your investment needs.
- One-stop solution
If it hasn’t been clear yet, hybrid funds are a one-stop solution to investors. They can enjoy the high returns attribute of equity funds and stability of debt funds in a single fund.
Just like any other type of mutual funds, you must invest in hybrid funds after careful analysis of your investment portfolio. The objectives of your hybrid funds must be aligned with your financial goals, investment horizon, and risk appetite. Happy investing!