Hybrid Funds: The Basics, Types, Benefits, and More

People opting for mutual fund investments can be divided into two. One group that signs up for equity funds. In accordance with the name, these funds invest in equities and their related securities. As funds are exposed to the equity market, these schemes are known for coming with the potential of offering higher returns. But it is also important to remember that equity funds come with a lot of risks. So, people who don’t want to take risks, opt to sign up for debt funds.

Debt mutual funds can be defined as mutual fund schemes that are known for investing in fixed-income securities such as bonds and treasury bills. As they invest in fixed-income securities, debt funds are known for being a relatively less risky investment option in comparison to equity funds. Schemes such as monthly income plans (MIPs), short-term plans (STPs), gilt funds liquid funds, and fixed maturity plans (FMPs) are some examples of debt funds. But there is an investment scheme that is an amalgamation of both debt and equity funds. The said investment scheme is referred to as a hybrid fund.

What are hybrid funds?

Hybrid funds can be defined as a variant of mutual funds that are known for investing in two or more categories of asset classes. Hybrid funds allocate funds to a combination of stocks and bonds. Furthermore, some hybrid funds also use a broader asset allocation approach. Sometimes, hybrid funds invest in other assets like gold, real estate investment trusts (REITs), and commodities. These funds try to balance investment between different asset classes. Fund allocation is done with the aim of diversifying the portfolio. Balancing fund allocation might reduce the risk factor for the investors. In these funds, generally, the allocation of funds between debt and equity is decided as per the investor’s risk appetite, investment horizon, and financial goals.

How do these funds work?

Before going ahead and signing up for this investment scheme, it is wise to understand how hybrid funds work. Hybrid mutual funds are known for coming with the aim of achieving wealth appreciation in the long run.

Other than long-term wealth creation, hybrid funds also attempt to generate income in the short run by creating a balanced portfolio. The fund manager allocates your money in varying proportions in either equity or debt securities, which is made based on the investment objective of the fund. Sometimes, the fund manager may also choose to buy or sell securities to take advantage of market movements.

But just signing up for a hybrid fund is not enough. It is also imperative to sign up for the right variant of these funds. Some of the different types of hybrid funds are:

  • Equity-oriented hybrid funds:

If more than 65% of the fund’s assets are allocated to equity and the remaining to debt and money market instruments, it is referred to as an equity-oriented fund.

  • Debt-oriented balanced funds:

If the fund manager allocates more than 65% towards debt instruments, it is referred to as debt-oriented balanced funds. They are known for investing in fixed-income avenues like debentures, bonds, government securities, treasury bills, and many more. For liquidity, a portion of the fund is also invested in cash and cash equivalents.

  • Monthly Income Plans:

This variant of hybrid funds invests mainly in debt instruments. Under these plans, the exposure to equities would be approximately 15-20%. MIPs are hybrid fund schemes that are known for providing regular income to the investor in the form of dividends.

Are there any benefits associated with hybrid funds?

Some of the merits associated with signing up for hybrid funds are:

  1. These come with the perfect balance of risks and returns:

Hybrid funds help in striking the right balance between risks and returns. This is an alluring benefit of hybrid funds. In contrast to pure equity funds, these funds assure the stability that’s offered by assets like debts. The presence of stability thanks to the debt component allows you to experiment with high-return equity investments. Also, the debt component cushions your investment against the volatility of equities. These funds can mitigate the risks associated with the equity component.

  1. With the help of a single fund, you can enjoy access to multiple asset classes:

In the case of other variants of mutual funds, you are required to sign up for different investment schemes to invest in different asset classes. However, that’s not the case for hybrid funds. By signing up for these funds, you can invest in multiple asset classes with the help of a single investment scheme.

Who might find hybrid funds suitable?

These funds are considered ideal for people seeking a stable investment option. This variant of mutual funds is known for providing you with a higher income than some debt funds. As they might provide higher returns than debt funds, they are known for alluring conservative investors. Other than conservative investors, even fresh investors willing to expose themselves to equity markets may sign up for hybrid funds. The equity portion has the potential to earn higher returns and, simultaneously, the debt component serves as a cushion against extreme market fluctuations.