Hybrid funds can aim to help you build a diversified investment portfolio by investing in more than one asset class. Diversification is key to investing. Thanks to all the different types of mutual funds available, it can now be easier for investors to build a diversified portfolio.
But while selecting individual schemes from various fund categories is one option to achieve diversification, hybrid funds can also be an alternative. Read this blog to know what they are, their features, their types, and more.
What is Hybrid Fund?
A hybrid fund is a mutual fund scheme that invests your money in more than one asset class, like equity, debt, and others, as per the scheme objective. The mix of asset classes aids in diversification and may have the potential to reduce the risks involved.
For instance, a hybrid fund that invests in equity and debt assets is considered less risky than pure equity funds and can generate potentially reasonable returns in long run
What are the Different Types of Hybrid Funds?
To better understand hybrid fund meaning, it’d help if you know the different types of funds available in this category. Here are some types of Hybrid Funds-
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Aggressive Hybrid Funds
Aggressive or equity-oriented hybrid funds invest 65% to 80% of the portfolio in the equity asset class. The rest is invested in debt instruments.
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Conservative Hybrid Funds
Conservative or debt-oriented hybrid funds invest 75% to 90% of the portfolio in debt instruments. The rest is invested in equity and related instruments.
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Dynamic Asset Allocation Funds
These mutual funds dynamically invest across equity and debt instruments depending on the market conditions and scheme objective.
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Multi-Asset Allocation Funds
Multi-asset funds invest at least 10% of the portfolio in three asset classes. The two of these asset classes typically include equity and debt. The 3rd asset class could be real estate, gold, etc. The exposure in each asset class is increased or decreased per the market conditions.
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Arbitrage Funds
Arbitrage funds aim to profit from the difference in the price of securities between two markets, like cash and futures. For tax purposes, arbitrage funds are considered equity funds and have an equity exposure of at least 65%. The rest is invested in debt instruments.
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Equity Savings Funds
Along with equity and debt instruments, equity savings funds also invest in arbitrage opportunities in the cash and derivatives market. However, these funds need to invest at least 65% of their portfolio into equity and at least 10% into debt instruments. Moreover, these funds are obliged to state the minimum hedged and unhedged exposure in the Scheme Information Document (SID) clearly.
What are the Features of Hybrid Mutual Funds?
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Diversification
The most significant advantage of investing in hybrid funds is diversification. Investing in a single hybrid scheme can give you exposure to two or more asset classes .
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Active Fund Management
These are actively managed funds where fund managers constantly look for opportunities to generate long-term returns.
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Can be suitable depending on Risk Profile
With options like aggressive, conservative, dynamic asset allocation, and more, there are hybrid schemes for every risk profile.
How Do Hybrid Funds Work?
Hybrid funds invest in two or more asset classes that aim to generate long-term returns and offer the potential for long-term wealth creation through capital appreciation.
Fund managers build an investment portfolio as per the scheme objectives and actively manage and rebalance the portfolio according to the market conditions to deliver returns. As these are generally open-ended schemes, investors are free to invest and redeem their investments as they see fit.
How to Invest in Hybrid Funds?
You can make a lump sum amount or start a Systematic Investment Plan (SIP) in any hybrid scheme of your choice. Here are the steps you can follow to invest in hybrid funds-
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Compare the top hybrid funds and choose one as per your financial goal and risk appetite
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Visit the official website of the fund house offering the selected scheme
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Register for a new account and complete online KYC, if you are already a registered user, directly transact.
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Once your account is ready, search for the hybrid scheme you’d like to invest in
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Choose between lump sum and SIP
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Make the payment online
Depending on the investment amount and NAV of the scheme, the fund house will assign a certain number of units to your account within 1-2 working days. You’ll receive an email update after investing and once the units are assigned.
Click Here to know what is SIP?
What are the Things You Should Consider Before Investing in Hybrid Funds?
Now that you know what is a hybrid fund, its features, and how to invest, you can start investing. But don't forget to consider these factors before you begin-
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Financial Goals
When selecting a hybrid fund, ensure that the scheme’s objective aligns with your financial goals.
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Investment Horizon
Investors can opt for Aggressive hybrid schemes for a longer investment horizon of 5 years or more. On the other hand, investors can select conservative hybrid funds for short to medium-term investment horizons.
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Risk Appetite
Consider your risk appetite before investing in hybrid funds. For instance, aggressive schemes can be opted for risk-bearing investors, and conservative hybrid schemes can be opted for risk-averse investors.
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Past Performance
While comparing top hybrid funds, you should check the past performance of the scheme, at least 5-10 years.
Build a Diversified Investment Portfolio with Hybrid Mutual Funds.
By investing in more than one asset class , hybrid funds make it easier for investors to build a diversified portfolio. Moreover, with all the different hybrid schemes available, it is easier to select one based on your goals and risk appetite.
If you are new to mutual funds, it'd be wise to start small and grow your investments as you gain more knowledge and experience. As all mutual funds come with a certain risk level, you can consult an investment advisor before investing.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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