What exactly are hybrid funds?

At its core, a hybrid fund is a type of mutual fund that combines both equities (stocks) and fixed-income instruments (like bonds). This dual approach is designed to provide investors with the benefits of both growth from equities and income from fixed-income securities. Read on to understand the concept of hybrid funds in more detail.

Breaking down types of hybrid funds

1. Aggressive hybrid funds

These are equity-oriented hybrid funds that typically allocate 65% to 80% of their assets to equity and equity-related instruments and the remainder to debt instruments. These equity-oriented hybrid funds are suitable for investors seeking capital appreciation with a medium to high risk appetite.

2. Conservative hybrid funds

Contrary to aggressive hybrid funds, these funds majorly invest in debt instruments and only invest between 10% to 25% in equities. They are apt for those who want regular income with moderate risk.

3. Balanced funds

These funds aim to maintain a balance between equity and debt, often splitting the investment 50-50, though this can vary. They strive for a balance between risk and return.

4. Dynamic asset allocation funds

The allocation between equity and debt in these funds is dynamically managed, depending on market valuations. When equities are perceived as expensive, the fund may decrease its equity allocation and vice versa. There is no minimum mandated allocation in either equity or debt in these types of hybrid funds and the fund manager has the flexibility to make decisions based on the market conditions.

5. Multi asset allocation funds

These funds invest in more than two asset classes. For instance, apart from equity and debt, they might invest in gold or real estate. The idea is to further diversify and reduce risk.

 Why opt for hybrid funds?

• Diversification: One of the golden rules of investing is not to put all your eggs in one basket. With hybrid funds, diversification is inherent. They spread your investment across different asset classes, ensuring that potential setbacks in one asset class may be offset by gains in another.

• Flexibility: Based on market conditions and the fund’s objective, the fund manager reallocates the portfolio between equity and debt. This active management can provide an edge during volatile markets.
• Tailored risk-return profile: Hybrid funds allow investors to choose a fund based on their risk appetite. For instance, an aggressive hybrid fund might invest more in equities than in debt, making it riskier but also potentially offering higher returns. Conversely, a conservative hybrid fund might lean more towards debt, offering more stability.

Points to consider

• Risk factor: While hybrid funds spread risk, they are not risk-free. The equity component can make them vulnerable to stock market fluctuations. It’s crucial to align the fund’s risk profile with your own.
• Tax implications: The tax treatment for hybrid funds depends on their equity allocation. Funds that invest 65% or more in equities are treated as equity funds for tax purposes. This can have implications for capital gains tax.
• Performance history: While past performance isn’t indicative of future results, reviewing a fund’s historical returns can provide insights into its management quality.

Hybrid funds, with their blend of equities and fixed-income instruments, offer a compelling proposition for investors looking to strike a balance between risk and reward. As with all investments, understanding your financial goals, risk tolerance, and staying informed will guide you in making the best decisions. If in doubt, consulting a financial advisor can provide clarity tailored to your unique financial situation.