Mutual funds are broadly classified into three categories, namely, equity funds, debt funds and hybrid funds. Hybrid funds are a type of mutual fund that invests in both equities and debt instruments. Typically, the asset allocation is 40 per cent in equity and the remaining 60 per cent in debt. The asset mix helps investors earn stable returns in the short-term and build wealth in the long-run. These funds are known to provide growth as well as periodic returns.
In this article, we look at what are hybrid funds, its types and the benefits of investing in debt hybrid funds.
Types of hybrid funds
Hybrid funds are generally categorised under three types based on asset allocation. These include debt-oriented hybrid funds, equity-oriented hybrid funds and balanced hybrid funds. Each of these types has a different asset mix, which ultimately determines the nature of the fund.
Hybrid funds are considered a safe investment avenue as they offer a balanced portfolio. Let us look at the advantages of investing in hybrid funds.
Features and benefits of hybrid funds
Less volatile
Pure equity instruments are susceptible to market volatility. Since hybrid funds also comprise of a debt element, it can help investors overcome market volatility.
Diversified portfolio
As mentioned earlier, hybrid funds invest in both equity and debt instruments, thereby offering a diversified portfolio to the investor. The debt element in the portfolio is known to provide stability, while the equity element has the potential of giving good yields.
High returns
Hybrid funds are known to offer decent gains. In fact, if we were to look at past performances, hybrid funds have been known to outperform equity funds in a few cases. Historically, hybrid funds have provided better returns as compared to large-cap funds.
Less expensive
Since hybrid funds offer a degree of stability due to the debt component, they do not require active management. Plus, the operating expenses on these funds can be economical. Hence, you may also get a lower expense ratio on such funds.
An ideal choice for novice investors
Hybrid funds are regarded as a safe investment alternative for new investors. This is because first-time investors do not have the risk-bearing capacity to invest in pure equity instruments. Hybrid funds are known to offer safety while also giving equity exposure. However, like every form of investment, mutual fund investments too come with market risk. Therefore, investors should be prepared for the inherent risks associated with equity investments.
Balanced portfolio
Hybrid funds offer a perfect balance between risk and returns. They can ensure yields even in a bear market. This provides a reasonable degree of flexibility to investors. Besides, they can also choose the ideal asset mix based on their investment objective, risk appetite and investment horizon.
The bottom line
Hybrid mutual funds can be an ideal investment choice for investors looking for moderate growth. Since hybrid equity funds invest in equity instruments, they are subject to market volatility. Therefore, before you decide to invest in mutual funds, it is essential to know what is a mutual fund and how they work.
