Hybrid funds are a combination of more than a single asset class. They combine debt and equity assets but may also have real estate or gold. These kinds of funds are based on diversification, correlation, and asset allocation.

Diversification refers to holding several assets in an investor’s portfolio. Correlation is the movement of returns among different assets, while allocation pertains to distributing wealth among various asset classes. A hybrid fund can be a lucrative investment for many, so let's explore their types and benefits.

Different Types of Hybrid Funds

Here are some of the several kinds of hybrid funds that investors can pick from.

• Arbitrage Fund:

  Arbitrage fund is all about buying in the cash market and selling the units in the future market to gather returns. The return is based on the price difference of both markets.

• Conservative Hybrid Funds:

  These funds are about investing 10-25% of the total assets in equity-related and equity instruments. The rest 75-90% is invested in debt instruments. These funds are great for generating income from the debt component. Whereas the equity component helps with boosting the overall return.

• Equity Savings Fund:

  These funds are used for balancing returns and risks by investing in derivatives, equity, and debt. The derivative decreases equity exposure and market volatility while generating a consistent return.

• Aggressive Hybrid Funds:

  This fund is about investing at least 65% and the highest 80% in the equity assets, and the rest goes to the debt assets. This has a high likelihood of incredible returns at less risk.

• Balanced Advantage or Dynamic Asset Allocation Fund:

  This fund is dynamic and can shift from a 100% equity asset class to a 100% debt asset class. The allocation is determined based on the financial model used by the fund. Such an investment is great for those who want to automate their asset allocation.

• Multi-Asset Allocation Fund:

  This fund requires investments in a minimum of three asset classes, with at least 10% in every asset class.

The Advantages of Investing in Hybrid Mutual Funds

Hybrid funds come with unique benefits that pay off eventually, and these advantages include the following:

• Buying Low and Selling High:

  Rebalance the investment portfolio by adjusting asset allocation within a specific limit. This way, you can sell a specific asset class when it is high and buy when it's low.

• Catering to Different Risk Profiles:

  The hybrid mutual funds offer distinct levels of risk tolerance that can be anywhere between conservative to aggressive. Equity-oriented funds can be used by investors with a high-risk appetite. At the same time, debt-oriented investments can be for risk-averse people. At the same time, the dynamic asset allocation fund is present for those who do not want a fixed asset allocation. But if you are seeking stable returns even during an unstable environment, then the arbitrage funds are the best choice.

• Diversification:

  A hybrid fund helps diversify the investment portfolio across sub-classes and without being limited to a few asset classes. You can invest in mid-cap, large-cap, and small-cap growth stocks or value within the equity allocation.

• Mitigating the Risks:

  Hybrid funds help mitigate investment risk through asset allocation and portfolio diversification. They manage risk by infusing any non-correlated asset class.

• Investing in Multiple Asset Classes:

  Hybrid funds are a convenient way of investing in several asset classes at once. It not only increases the returns but also divides the risks between several assets.

Factors to Consider Before Investing in a Hybrid Fund

Investing in hybrid funds has several benefits, but some factors should be evaluated before making an investment.

Time Horizon

Hybrid funds are great for a medium to long-term time horizon. The longer you leave it, the higher the chance of getting better and stable returns.

Cost

A hybrid fund charges a fee called the expense ratio. It is better if the expense ratio is lower, but a high ratio will affect the fund’s returns.

Risks

Hybrid funds do not have a lot of risk, but they are not devoid of it altogether. Its riskiness depends on the amount of equity holding in the investment portfolio. The fund’s risk factor depends on whether the equity component is high or not. The risk is defined by the part of the equity market in which the fund is invested and the tactic that was used to make that investment.

However, the risk for debt-oriented funds is defined by whether the portion is managed for capital gains or interest income. A fund is less risky if the return primarily comes from interest income.

Returns

The hybrid mutual funds’ return depends on the underlying investments’ performance. For instance, an aggressive-oriented hybrid fund’s returns correlate with the equity markets. So, its performance is affected if the funds are equity allocated in a rising market. But it outperforms pure equity funds in a falling market.

Finding the Right Hybrid Fund for Investors

Since there are several kinds of hybrid funds, it's necessary to pick the right fund. Evaluate the diverse kinds based on their consistency in return, expense ratio, risk, and other factors. The Right hybrid funds for you should constantly be good performers when it comes to returns. But it's also necessary to focus on what kind of risks have been undertaken to achieve the desired return.

Conclusion

Hybrid funds can be a great investment depending on what your long-term financial goals are. They are great for a lot of purposes, including diversifying your portfolio. However, they are also known for providing great returns depending on which hybrid fund you pick. Therefore, the above information can be used to estimate the most lucrative fund. Invest in it depending on your risk tolerance and for tapping into different asset classes. At the same time, if you find it overwhelming to keep track of your portfolio, then you can always get professional assistance for it.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.