Hybrid Mutual Funds Explained: Benefits, Types & Risks

Investing in a mutual fund often comes with an important question: Should you choose the high growth potential of equities or the debt instruments for stability? What if you don't just have to choose one? This is where hybrid mutual funds originate.

Table of Content

• What is a Hybrid Mutual Fund?
• Types of Hybrid Mutual Funds
• Benefits of Investing in Hybrid Funds

mutualIn a single portfolio, hybrid mutual funds provide the best of both worlds by combining equity and debt investments. Whether you are looking for balanced exposure or aiming to diversify as an experienced investor, hybrid funds are the best choice, offering a flexible and well-rounded option to suit various risk levels and financial goals.

What is a Hybrid Mutual Fund?

A hybrid mutual fund is an investment option that combines multiple asset classes, typically integrating stocks and bonds within the same portfolio. This combination helps in better risk management, as fund managers can adjust the allocation in response to changing market conditions. The primary objective of a hybrid fund is to distribute returns while reducing inflation and maintaining a balanced risk profile.

Types of Hybrid Mutual Funds

Listed below are some of the types of hybrid mutual funds where one can allocate their savings based on their financial goals.

Conservative Hybrid Fund

These types of funds invest primarily in debt (almost 75-90%) and the remaining in equity. It is perfect for an investor with a low-risk appetite and a short to medium-term investment horizon. The goal of this fund is to generate continuous income with minimal market volatility.

Balanced hybrid Fund

Balanced hybrid funds allocate 40–60% of the portfolio to equity and debt. They are suitable for investors with a medium risk profile and medium to long-term investment targets. The purpose of these funds is a mixture of capital growth and income stability.

Aggressive Hybrid Fund

Aggressive hybrid funds invest a high ratio in equity (65–80%) and the rest. These are best suited to investors with high-risk tolerance and a long-term investment perspective. The goal is to achieve high growth capacity while maintaining a stable level. This category is also known as equity hybrid or hybrid equity funds.

Dynamic Asset Allocation/Balanced Advantage Fund

Based on market conditions, these funds adjust their allocation of equity and debt. The fund manager dynamically adjusts their allocation in response to any underperforming asset class, which helps improve returns and manage risks. The built-in flexibility makes these funds highly favourable for market trends.

Equity Savings Fund

Equity savings funds combine equity, loans, derivatives, and arbitrage strategies to give stable returns with low risk. The purpose of the equity part is to generate development, while the debt component adds stability. These funds are usually safer than pure equity funds and are more tax-efficient than debt funds.

Suggested Read: TYPES OF MUTUAL FUNDS AVAILABLE IN INDIA

Benefits of Investing in Hybrid Funds

Active Risk Management

Hybrid mutual funds actively manage risk by bringing diversity in various asset allocations, mainly equity and debt. Since these assets often move in opposite directions during market cycles, their combination helps reduce the overall portfolio risk.

Diversification

These funds provide wide diversification not only between the asset classes but also within them. For example, the equity part can be spread in large-caps, mid-cap and small-cap stocks as well as price and development strategies. This layered diversification increases withdrawal capacity when managing risk.

Caters to various risk profiles

These funds can offer various levels of risk tolerance from traditional to moderate and aggressive. There are equity-oriented schemes for risk-carrying loan-oriented schemes, which are for risk-relievers and dynamic asset allocation funds for those who do not want to stick to a certain asset allocation but want to shift basic market ideas without taking calls. Arbitrage is for investors seeking stable returns in an unstable environment.

Automatic Rebalancing

One of the most significant benefits is that the fund manager handles rebalancing. Investors do not need to track markets or adjust their portfolio manually by making efforts and potentially emotional decisions.

Hybrid mutual funds offer a smart solution for investors seeking to strike a balance between growth and stability. By combining equity's refund capacity with the risk-showing advantage of the loan, they offer a well-rounded investment option suitable for both early and experienced investors.

Like all market-linked investments, hybrid funds carry risk. The level of risk primarily depends on the fund's equity exposure. A higher equity allocation generally means a higher risk.

With any investment decision, it is important to assess your financial goals, assess risk tolerance, and consult a financial advisor for guidance. Rest. If you are looking for a simplified investment experience with a stable performance capacity, hybrid mutual funds are definitely worth considering.