Looking For Investment Options? Why Hybrid Funds Should Be On Your Portfolio?

Investing in India can often feel like navigating a maze with countless options, each promising substantial returns. Amidst this plethora of choices, hybrid funds are a versatile and balanced investment option that can cater to a wide range of investor needs. But why should hybrid funds be a part of your investment portfolio? Let’s delve into what is hybrid fund, its benefits, and why it deserves a spot in your investment strategy.

What Are Hybrid Funds?

A hybrid fund, also known as a balanced fund, is a mutual fund that invests in diverse asset classes, typically stocks (equity) and bonds (debt). The goal is to balance growth and income, offering the potential for higher mutual fund returns from equities while reducing risk with the stability of debt instruments.

Types of Hybrid Funds

  • Aggressive Hybrid Funds: Invest 65-80% in stocks and 20-35% in bonds. They are the most aggressive and risky among hybrid funds.
  • Balanced Hybrid Funds: These funds split investments equally, with 50% in stocks and 50% in bonds. Fund managers can offer aggressive or balanced hybrid funds, but not both.
  • Dynamic Asset Allocation Funds: Adjust their mix of stocks and bonds based on market conditions, with no fixed limits. These funds tend to be less volatile than aggressive hybrid funds.
  • Equity Savings Funds: They use derivatives to partially hedge stock investments while keeping at least 65% in stocks and at least 10% in bonds. Due to the arbitrage component, these funds offer tax benefits similar to pure equity funds.
  • Multi-asset allocation Funds: These funds invest in at least three asset classes, such as stocks, bonds, and gold, with a minimum of 10% each. They can also include real estate or international stocks.
  • Conservative Hybrid Funds: Invest 75-90% in bonds and 10-25% in stocks. Suitable for investors with low to moderate risk tolerance who still want some equity exposure.
  • Arbitrage Funds: Fully hedge stock investments using an arbitrage strategy, maintaining at least 65% in stocks. They are good for low-risk, short-term investments and enjoy equity taxation benefits.

Why are Hybrid Funds Important in Your Investment Portfolio?

Hybrid fund offers several advantages that make them a valuable part of an investment portfolio:

  • Balanced Risk and Return: The mix of stocks and bonds helps balance potential high returns with reduced risk, making it easier to achieve financial goals.
  • Periodic Rebalancing: Fund managers regularly adjust the asset mix to maintain the target allocation, helping to manage risk and improve returns over the long term.
  • Lower Volatility: Hybrid funds are less volatile than pure equity funds, making them suitable for new investors wary of market swings.
  • Stable Investment Experience: Hybrid funds offer stability, which can reduce stress and help investors avoid making poor decisions during market fluctuations.
  • Tax Benefits: Hybrid funds with more than 65% in stocks enjoy equity taxation benefits. Those with 35-65% in stocks benefit from favourable tax treatment on long-term gains through indexation.

Benefits of Hybrid Funds

Access to Multiple Asset Classes: Hybrid mutual funds allow investors to access various asset classes like equity and debt within a single fund, eliminating the need to invest in multiple funds.

  • Active Risk Management: Hybrid funds manage risk effectively by diversifying across non-correlated asset classes. They combine the growth potential of equities with the stability of debt.
  • Diversification: These funds diversify across asset classes and within sub-classes. For instance, in equities, they may invest in large-cap, mid-cap, or small-cap stocks, as well as value and growth stocks.
  • Varied Risk Profiles: Hybrid funds cater to different risk tolerances, offering equity-oriented schemes for risk-takers, debt-oriented plans for the risk-averse, dynamic asset allocation funds for flexible investors, and arbitrage funds for stable returns in volatile markets.
  • Automatic Rebalancing: Fund managers handle portfolio rebalancing, saving investors the time and effort needed to monitor markets and manage asset allocations.

Final Word

Hybrid funds offer a compelling investment option for those looking to balance growth and stability. Their diversified portfolio, balanced risk-return profile, and professional management provide a simplified yet effective way to invest in equities and debt. Whether you’re a new investor or looking to add stability to your existing portfolio, hybrid funds can play a crucial role in helping you achieve your financial goals.