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What are hybrid funds?

mahindra-finance-author

by Mahindra Finance

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June 30, 2023

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3 mins read

What are mutual funds?

Mutual funds are professionally managed funds that invest into multiple assets financial instruments such as stocks and bonds. Mutual funds usually charge a fee for holding and managing the assets within their portfolio, making changes as and when necessary to meet the fund objectives.

Why mutual funds?

Investors usually invest in mutual funds for the following reasons:

  • The funds have specific objectives, which are easy to align with financial goals. E.g., monthly income, or high returns, etc
  • The risk is reduced as compared to direct stock picking since it consists of a portfolio of stocks, bonds, and other instruments
  • They allow investments through the Systematic Investment Plan (SIP) mode with as low as INR 500 per month
  • Wide variety of funds to pick from, backed by strong fund houses in the market

What are hybrid funds?

Now that we understand what mutual funds are and why investors invest in them let’s look at what hybrid mutual funds are. The word hybrid suggests that the fund consists of more than one component. Hybrid funds invest in multiple asset classes: equity, debt instruments, gold, real estate, etc.

For example, if an investor is looking to take risks for a higher return yet also wants an assured regular income, a combination of equity and debt works the best, and this is what a hybrid fund offers.

Advantages of hybrid funds

  • Risk is actively managed by portfolio management and diversification
  • Fund managers automatically keep rebalancing the portfolio to fulfill the investment objectives of the fund
  • Holding multiple asset classes by investing in one fund
  • Choice of funds based on risk appetite, objective, and duration

What are the types of hybrid funds?

  • Equity hybrid funds or aggressive funds where there is a minimum 65%, maximum 80% allocation towards equity, with the remaining 20 to 35% into debt. Most equity-oriented schemes are eligible for the tax deduction, making them more attractive.
  • Balanced funds where a minimum of 40% to 60% is invested in debt or equity, and the balance in the other. Their goal is usually a combination of regular income and capital appreciation.
  • Conservative funds where there is a minimum 10%, maximum 25% allocation towards equity, with most of the amount, between 75% to 90% invested in debt. Their goal is usually a regular income with a small amount that has the potential for good returns.
  • Dynamic funds are funds where the allocation % can be changed during the tenure of the fund and thus can address the dynamic nature of one’s investment goals even within the duration for which the investment has been made.
  • Multi-asset allocation funds where the allocation is in a minimum of 3 asset classes, with a minimum of 10% in each asset class. These funds have investment goals that the fund manager decides.
  • Arbitrage funds where a minimum 65% is allocated to equity; however, the fund follows an arbitrage strategy: to buy low and sell high in different markets.
  • Equity savings funds where minimum 65% assets are invested in equity and equity-related instruments, and the rest is invested in debt and derivatives classes.

Top hybrid funds in the market

Some of the best hybrid funds based on performance are: table pending

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