Hybrid Mutual Funds - Combining Debt And Equity

Hybrid Mutual Funds - Combining Debt And Equity
Hybrid Mutual Funds - Combining Debt And Equity
20 November 2023

As we move through life's different stages, our financial priorities and goals shift, as does our capacity to handle investment risks. Hybrid funds are tailored to meet these changing financial objectives by striking a balance between potential growth and safety.

Understanding Hybrid Funds

Hybrid funds are a class of mutual funds that spread investments across stocks and bonds with varying allocations across subcategories.

As we know, stocks are riskier than bonds but also have the potential to generate higher returns in the long run. But it is important to have both in your investment portfolio so that it is diversified. What differs across investors is how much equity and bonds you should have in your portfolio.

If you're willing to take on more risk for the chance of greater returns, you might choose a fund that leans heavily toward equity. Conversely, if you prefer safety, you might select a fund that emphasises bonds.

Types of Hybrid Funds

The SEBI (Securities and Exchange Board of India) has classified hybrid funds into 7 types. The types are based on allocation to different asset classes like debt, equity and hybrid.

Conservative Hybrid Funds:

Ideal for risk-averse investors, these funds primarily invest in low-risk debt instruments, dedicating a smaller portion to stocks to capture some equity growth while focusing on protecting your investment.

  • Equity allocation: 10-25%
  • Debt allocation: 75-90%

Aggressive Hybrid Funds:

These are for investors who are comfortable with risk and desire significant exposure to stocks for potential growth, while also maintaining a portion of their investment in bonds for some security.

  • Equity allocation: 65-80%
  • Debt allocation: 20-35%

Balanced Hybrid Funds:

If your risk preference is moderate, these funds maintain an equal balance between stocks and bonds, offering a mix of growth potential and safety.

  • Equity allocation: 40-60%
  • Debt allocation: 40-60%

Dynamic Asset Allocation Funds:

Also known as balanced advantage funds, these funds allow managers to adjust the mix of stocks and bonds without any floor/ceiling allocation. This means the funds can allocate even 100% of their assets to equity/debt if they want to.

  • Equity allocation: 0-100%
  • Debt allocation: 0-100%

Multi-Asset Allocation Funds:

Diversification is key in these funds, which spread investments across various assets, including stocks, bonds, and commodities like gold, aiming for broad-based growth and risk mitigation.

These funds are required to invest at least 10% of their assets in at least 3 asset classes.

  • Asset 1 allocation: 10%+
  • Asset 2 allocation: 10%+
  • Asset 3 allocation: 10%+

Arbitrage Funds:

These funds seek to profit from price differences in different markets, ideal for investors who prefer to avoid the hassle of constant market tracking, relying on fund managers to spot and seize these opportunities.

  • Arbitrage investment strategy
  • Equity and related instruments allocation: 65%+

Equity Savings Funds:

Equity savings funds invest primarily in equity but they are required to hedge the equity exposure using derivatives. Hedging the equity exposure helps in downside protection of the portfolio.

  • Equity and related instruments allocation: 65%+
  • Debt allocation: 10%+
  • Equity allocation should be hedged with derivatives

Choosing the Right Hybrid Fund

Hybrid funds propose a way to invest that can safeguard part of your capital through debt while still offering growth through equity.
Selecting the right hybrid fund demands a clear understanding of your financial needs and how much risk you're willing to accept. The decision on how much to invest in stocks is yours to make, based on your individual risk tolerance.

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