Explore the opportunities and challenges in hybrid funds

The are several misconceptions about mutual funds which is why a lot of investors aren’t able to take advantage of the benefits it offers. People believe that investing in mutual funds is as good as gambling because all mutual funds invest in the stock market which is highly volatile in nature. But what investors do not know is that within the mutual fund gamut there is an end number of investment opportunities that they can explore based on their risk appetite, investment objective, and investment time horizon.

One such subcategory under the mutual fund is hybrid schemes which offer a balanced portfolio to retail investors. Let us understand what hybrid funds are and what are the different types of schemes under hybrid which one may consider for diversification of investment portfolio.

What is a hybrid fund?

A hybrid fund is a ‘hybrid’ of two or more asset classes. Hybrid funds invest in both equity and debt unlike equity funds or debt funds that predominantly invest in equity and debt markets respectively. This is a one-of-a-kind mutual fund scheme that combines the best of both asset classes. The equity component of the hybrid fund tries to generate wealth by taking added risks whereas the debt component offers the much needed cushion when the markets turn volatile and generates stable returns.

What are the investment opportunities under hybrid schemes?

Let us take a look at all the products under the hybrid fund category currently available for investment –

Conservative Hybrid Fund – SEBI mandates this fund to invest between 10 percent to 25 percent in equity and equity related instruments and between 75 percent to 90 percent in debt and debt related instruments.

Balanced Hybrid Fund – A balanced hybrid fund invests anywhere between 40 percent to 60 percent each in Equity and Equity related instruments and in debt instruments.

Aggressive Hybrid Fund – The aggressive hybrid fund is more equity oriented. As per SEBI guidelines, this fund is mandated to invest a minimum of 65 percent to 80 percent of its total assets in equity and the remaining of the portfolio is allocated to debt instruments.

Dynamic Asset Allocation Fund / Balanced Advantage Fund – A dynamic asset allocation fund can dynamically shift its portfolio from one asset class to another to favor any asset class that seems lucrative at the moment.

Multi Asset Allocation Fund – A multi asset allocation fund invests in a minimum of three asset classes (mostly equity, debt, and gold). As per SEBI guidelines, these hybrid schemes must invest a minimum of 10 percent each in all three asset classes.

Arbitrage Fund – An arbitrage fund maintains an equity heavy portfolio by investing a minimum of 65 percent of its total assets in equity and equity related instruments whilst exploring arbitrage opportunities.

Equity Savings Fund – This hybrid fund is equity oriented as it invests a minimum of 65 percent in equity and equity related instruments and a minimum of 10 percent in debt instruments.

What are the challenges faced by hybrid schemes?

Striking the right balance between both asset classes is crucial and is something which hybrid fund managers find challenging. A hybrid scheme with an unbalanced portfolio might not be able to deliver as per the investor’s expectations. Hence, fund managers have to be extremely careful when choosing equity and debt related securities so that both these asset classes support the fund to drive in the alpha throughout market cycles.

Hybrid funds carry investment risk and do not guarantee returns. Retail investors must consult their financial advisors before investing.

Related Articles

Back to top button