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Today, investment is a large part of any individual’s life and has a key role to play while you grow your wealth. Hence, it is important to know about different investment instruments and products. One of the most popular ways of investing capital, as you may have heard by now, is via mutual funds. With regard to mutual fund investors, they can be classified into three distinct categories: those who can take risks, those who want to play safe, and those who don’t mind a bit of risk and want safety too. The third category, those investors who want the best of both risk combined with safety, are the investors who go in for hybrid funds.

Understanding Hybrid Funds

Hybrid funds, as their name suggests, invest your wealth in equity and debt combined. This is done for portfolio diversification and to mitigate your risks in investment. An ideal mix of debt securities and equities gives you a balanced fund that offers you lower risk, but if held for a long span, great returns. The choice of which among the many hybrid funds you opt for depends on your risk appetite and your future financial goals.

How Hybrid Funds Work

The aim of hybrid funds, which are operated and run by fund managers, is to appreciate your wealth in the long term and act as a short-term income source through a balanced portfolio. Fund managers in different types of hybrid funds allocate your capital to debt-based and equity-based securities in varying proportions. If your appetite for risk is high, the fund can comprise more equity than debt, and if you have a low-risk appetite, you can choose to have more debt allocation in any given fund. It is the role of the fund manager to purchase and sell securities in line with movements in the markets.

Should You Invest in Hybrid Funds?

As far as investment goes, fewer people wish to risk losing money. Hybrid funds are considered a safer proposition than regular mutual funds that invest wealth in equities. Furthermore, hybrid funds, while reducing risk, give more returns than those of just pure debt funds, so good returns are assured. If you are an investor leaning on the conservative side, various types of hybrid funds will interest you. However, hybrid funds can be a good bet for budding, just-beginning investors, too. Those who want to get some exposure to equities before being fully fledged equity investors can delve into hybrid funds first. Think of it this way, debt securities offer you a cushion against extreme market moves, and the equity part offers the potential for super returns.

Even if you are a daring investor, hybrid funds can give you the dynamism in investment that you are looking for. You can get great asset allocation features that stress more on top equities in your fund, to get you high rewards for longer-term future financial objectives.

Hybrid Funds – The Types You Should Know About

Depending on the way assets are allocated, hybrid funds may be classified into different types. These are explained below in more detail:

  • Equity Hybrid Funds

Hybrid funds that have 65% of the fund’s assets allocated to equities and the remainder in debt are equity-based hybrid funds. The equity part of the fund comprises equity stock of companies that span a range of industries like healthcare, finance, FMCG, automobile, real estate, and more.

  • Debt Hybrid Funds

In case fund managers allocate 65% of the assets of the fund to debt instruments, then a debt-based hybrid fund is created. The components of debt consist of government securities, bonds, debentures, treasury bills, and the like.

  • Arbitrage Funds

Certain fund managers create these funds by maximizing returns, buying stocks in one market at low prices, and selling it at profits in another market. However, there is a lack of arbitrage opportunities and in such cases, fund managers tend to stick to debt-based fund allocation.

  • Monthly Income Funds

Within the different types of hybrid funds, invest primarily in debt instruments. Any monthly income plan, or a MIP, generally has only 15% to 20% of exposure to equities. This allows the fund to generate returns that may be higher than solely debt funds. The aim of the MIP funds is to provide a monthly income source to the investor. The income in these kinds of hybrid funds is largely generated via dividends. Moreover, investors are permitted to select the frequency of the payout of dividends. This could be monthly, quarterly, or bi-annually. Monthly income plans can also be equipped with a growth option.

Considerations with Hybrid Funds

There are some things that investors should keep in mind while investing in hybrid funds:

  • Hybrid funds are not entirely without risk. There is always the potential for risk as some part of the fund comprises equities. However, with a regular rebalancing of a portfolio by a fund manager, this can be mitigated to a large degree and get you high rewards as well.
  • Hybrid funds do not guarantee high returns, and some might not get you returns at all. The returns are dependent on the underlying securities that a fund invests in. Market movements may affect funds, either positively or adversely, but when you do get returns, they could be extremely high.
  • There are costs associated with hybrid funds. The fund usually charges a fee for the management of an investor’s portfolio, and this is known as the ER, or expense ratio. You should do your research before choosing a fund as you can find one with a low ER and this translates to more savings for you.
  • You must pay heed to your distinctive investment horizon while choosing from an array of hybrid funds. Typically, hybrid funds suit mid-term to long-term horizons, like say, 5 to 7 years.
  • With hybrid funds, you must consider financial goals and taxation too. The components of equities in hybrid funds are taxed like any other equity investment.

How To Choose

Since you now have some knowledge about hybrid funds, it shouldn’t be difficult to make your choice. You must view hybrid funds from a number of perspectives. It is crucial that you do some research once you think of some hybrid funds to invest in. You can look at a fund’s past performance, as well as that of the fund manager (provided the same one is managing the fund). In addition to this, you must be aware of your own financial objectives, investment horizon, and risk tolerance.

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