Hybrid Mutual Funds – The Flavour of Equity and Debt in One

Published by Sharekhan Education | November 23, 2021

Hybrid Mutual Funds – The Flavour of Equity and Debt in One.

Have you seen a mule; the cross between a donkey and a horse? Confused as to how having seen a mule will help you understand hybrid mutual funds? In fact the mule is what we call a hybrid species; an animal created by crossbreeding two separate animal species to create a new one, with characteristics of both the parent species. Hybridization works well not just in the plant and animal kingdoms but also in the financial world; especially mutual funds.

As you know asset allocation is very important to help you meet financial success and theoretically you me and everyone who is investing should ideally follow investing norms and have a strategic asset allocation in place don’t you think? But seriously how many have really done so? Asset allocation actually makes investing simple. It puts you in charge of your portfolio. You know how much should be invested in equity and how much in debt. But on the contrary a quick look at your own portfolios will tell a different story. Yes, Yes!! You want to have an asset allocation in place and follow it by the rule but unfortunately for whatever reasons your portfolio is just out of shape isn’t it? Don’t worry. For you and others like you who are unable to stick to the plan, mutual funds have an easy way out in Hybrid funds.

What is a Hybrid Mutual Fund?

A hybrid mutual fund is typically a combination of different asset classes like equity and debt to create a new category of funds. Just like there are various new hybrid species created in the plant and animal kingdom we too have different types of hybrid funds basis the percentage of equity and debt in their portfolios.

Under the hybrid category SEBI has defined 7 different types to suit different investor needs. Earlier there was ambiguity in hybrid funds but with the new categorization of funds there is lot of clarity regarding its portfolio and asset allocation. Now you will be able to select funds that match your risk tolerance and portfolio requirement with ease.

Types of Hybrid Mutual Funds

Let us say you are an equity investor who wants a lower exposure to equity; you could pick between Conservative hybrid fund and Equity Savings Fund or maybe the Arbitrage fund. As these funds have owner exposure to equity as compared to the other hybrid funds they can be useful tools for investors wanting to taste the flavor of equity without taking too much risk. But if you want to have a balance of equity and debt in your portfolio you could pick the Balanced Hybrid fund. With typically a portfolio in the range of 40% to 60% in equity and similarly in debt these funds can help match your asset allocation needs.

If the thrill of equity excites you; you could opt for the Aggressive Hybrid fund or you could put your money in the Dynamic Asset Allocation fund. While the Aggressive Hybrid fund has a portfolio that is more inclined towards equity, the Dynamic Asset Allocation fund is dynamically managed by expert fund managers who depending on the market conditions shift between equity and debt. And finally is the Multi Asset Allocation fund; a fund that invests in more than wo asset classes.

Conclusion:

At the end we can say that as hybrid funds give you the flavor of equity and debt, it is important that from its various types you pick the ones that match your risk tolerance and time horizon to meet your goals. Remember random investing never helps.

Happy Reading!