Explore the opportunities and challenges in hybrid funds

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Retail investors are constantly reshuffling their investment portfolio, searching for new schemes that can perform and sync with the changing market trends. However, most mutual fund schemes like debt funds and equity funds have to potential to offer decent returns if one invests in them with patience, there are other mutual funds that one can explore for diversification. Mutual fund investors who wish to invest in a scheme that offers the benefit of multiple asset classes can consider investing in hybrid schemes.

What are hybrid funds?

Most people are aware of equity and debt mutual funds as they are one of the most sought after investment products among other mutual fund schemes. However, a lot of investors are yet to explore the multiple hybrid schemes that are available for investment. Hybrid funds aim to generate capital appreciation by giving investors the benefit of multiple asset classes. These funds invest in both equity and debt asset class to achieve their investment objective and outperform their underlying benchmarks.

How does a hybrid scheme work?

One thing we know by now is the hybrid funds invest in both equity and debt asset class. The equity element of the fund aims to generate risk-adjusted returns. On the other hand, the debt element tries to generate stable returns with minimum investment risk. Hybrid funds can be equity-oriented and debt-oriented, but their portfolio composition may vary depending on the investment scheme’s nature and objective. As there is a low correlation between both equity and debt asset classes, investors are less likely to bear losses.

Types of hybrid schemes

There are multiple mutual fund products under the hybrid schemes category and investors can consider investing in them based on their investment objective and risk appetite.

Multi-asset allocation funds: A multi-asset allocation fund invests a minimum of 10% each in any three asset classes (usually equity, debt, and gold). 

Balanced hybrid funds: Balanced hybrid funds are an open-ended scheme that invests a minimum of 40% and a maximum of 60% in both equity and debt asset classes. 

Conservative hybrid funds: As per SEBI norms, a conservative hybrid fund must invest a minimum of 75% to 90% of its total assets to debt and the remaining 10% to 25% in equity and equity-related instruments. 

Dynamic Asset Allocation Funds: A dynamic asset allocation fund (also referred to as balanced advantage funds) invests in various asset classes like real estate equity, debt, etc. 

Aggressive hybrid funds: An aggressive hybrid fund must invest a minimum of 65% to 80% of its total assets in equity and equity-related instruments, and the remaining of the assets are invested in debt-related instruments. 

Equity Savings Fund: An equity savings fund is an open-ended hybrid scheme that aims to generate returns by investing in equity, debt, and arbitrage opportunities.

Arbitrage funds: Arbitrage funds generate returns by buying and selling derivative instruments in the cash and futures markets. These funds may invest 65% to 100% of their total assets in equity while the remaining 35% in debt. 

The best way to invest in hybrid funds for the long term is by starting a monthly SIP. Systematic Investment Plan or SIP is a simple and easy way to invest small fixed sums periodically. This way investors can aim at creating long-term wealth through small systematic investments in hybrid funds. They can even make use of an online SIP calculator to determine the total returns that they may receive by investing in hybrid funds over a certain period of time.

Hybrid funds are mutual fund schemes that do not guarantee returns and investors should invest as per their risk appetite.

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About the Author: Alice T. Leroy

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