What is Hybrid Mutual Funds? - Definition, Types, and Benefits | Kotak Securities (2024)

Key Highlights

  • Hybrid mutual funds are a unique type of mutual fund that invests in various asset classes. These include stocks, fixed-income securities, and even real estate or gold.

  • Types of hybrid funds include Multi Asset Allocation Funds, Aggressive Hybrid Funds, Balanced Advantage Funds, Conservative Hybrid Funds, Equity Savings Funds, and Arbitrage Funds.

  • Hybrid mutual funds are suitable for investors who like low-risk investments with higher returns than debt funds. They are also good for individuals who have longer investment horizons.

  • Hybrid funds provide access to different asset classes with a single fund. Active risk management and portfolio diversification are the greatest benefits. So, they are suitable for different risk profiles.

What is a Hybrid Mutual Fund?

Hybrid mutual funds are a unique type of mutual fund that invests in several asset classes. In other words, they combine many different types of funds. They include stocks and fixed-income securities like bonds, debentures, treasury bills, etc. Hybrid funds are a combination of the three main asset classes – equity, fixed income, and commodities.

How do Hybrid Funds Work?

Hybrid funds try to generate profits in the short term. In the long term, It focuses on capital appreciation with a balanced portfolio. Based on the fund's investment goal, fund managers distribute your money across equities and debt in different proportions. The fund manager may trade securities in order to profit from changes in the market.

Types of Hybrid Funds

The following are the different types of hybrid mutual funds.

  • Multi Asset Allocation Fund: These schemes must invest in at least three different asset classes. Each class should have a minimum investment of 10% investment. These funds offer investors exposure to a wide range of asset classes. The fund manager determines the asset allocation.

  • Aggressive Hybrid Funds: These investment plans have to allocate at least 20-35% to the debt asset class and 65-80% to the equity asset class. Lesser allocation to the debt class offers an opportunity for significant profits at lower risk. They also take advantage of the taxation policy of equity-oriented funds.

  • Balanced Advantage Funds or Dynamic Asset Allocation: Asset allocation in dynamic investment funds can vary from a 100% debt to a 100% equity asset class. The fund's financial model serves as the recommended foundation for determining asset allocation. Investors who wish to automate their asset allocation might consider these funds.

  • Conservative Hybrid Funds: These funds must allocate between 10-25% of their entire assets to stocks and securities linked to stocks. Debt instruments constitute the remaining 75 to 90 percent. These funds seek to increase returns by generating earnings from the debt component and a very small portion of equity. This is a good investment option if you're ready to take a bit more risk.

  • Equity Savings Funds: These funds use debt, equity, and derivatives investments to try to balance risk and return. Derivatives lower volatility and help generate steady returns. In addition, the equity assets offer growth. These funds allocate 0-35% of their investments to debt asset classes and 65-100% to equity assets.

  • Arbitrage Fund: The arbitrage strategy tries to take profits from the difference in prices between two markets. It involves purchasing in the cash market and selling in the futures market. Derivative instruments are used in this strategy. Since there is a simultaneous purchase and sell, it results in consistent returns similar to debt.

Who Should Invest in Hybrid Mutual Funds?

The following investors can invest in hybrid mutual funds.

  • Hybrid funds are a good option for conservative investors looking for low-risk investment opportunities. They usually give higher returns than debt funds.
  • Some new investors want a significant amount of equity exposure throughout their whole portfolio without assuming significant risk. Hybrid funds are an excellent investment alternative for such investors.
  • Hybrid funds are appropriate for individuals with longer investment horizons since they include a sizable exposure to stocks.

Benefits of Hybrid Mutual Funds

Now that you know what hybrid mutual funds mean, let’s look at their advantages. They include the following:

  • It allows investors to access different asset classes through a single fund. This eliminates the need for multiple investments.

  • Hybrid mutual funds are fundamentally based on active risk management. They diversify their portfolio by investing in non-related asset classes like debt and equity.

  • One of the most important advantages of hybrid mutual funds is portfolio diversification. They diversify not only among various asset classes but also among their subclasses. For instance, they may invest in different types of stocks, like value or growth stocks, large-cap, mid-cap, or small-cap stocks.

  • Hybrid mutual funds combine elements of both aggressive and moderate investing and appeal to different risk profiles.

Things to Consider Before Investing in Hybrid Mutual Funds

You should consider the following factors while investing in hybrid funds.

1. Financial Objectives: Investors must have a clear understanding of their financial objectives and how a fund would help to meet them. An investor should only invest in a fund if the expected profits can help fulfil his financial goals.

2. Risk Appetite: You should not think of hybrid funds as entirely risk-free. There is risk associated with any financial instrument that invests in equity markets. It might not be as risky as stocks or equity funds. However, you still need to be careful and regularly rebalance your portfolio.

3. Investment Horizon: Hybrid funds are a type of fund for investors with a medium or long-term investment horizon. Their historical performance shows they are quite good for long-term investments. If one invests for a long period of time, he will also profit from the power of compounding.

4. Expense Ratio of the Fund: The cost an asset management company charges you annually to manage your assets is known as the expense ratio. It is a particular percentage of the profits from your investments. You should pick funds with a low-cost ratio. A high ratio lowers your net asset value (NAV). This decreases your effective payout at the time of redemption.

Conclusion

Hybrid mutual funds invest in different types of asset classes. There are many types of hybrid mutual funds. These include equity funds, multi-asset allocation arbitrage funds, balanced advantage funds, etc. They help with portfolio diversification. In addition, hybrid mutual funds actively manage risk by investing in non-related securities. So, they are a good choice for investors willing to take low or moderate risks. However, investors should carefully consider their investment horizon, financial goals, and risk tolerance before investing in hybrid mutual funds.

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As an enthusiast and expert in the field of mutual funds and investment strategies, my extensive knowledge is grounded in years of hands-on experience and continuous research in the financial markets. I've closely followed the trends, analyzed market dynamics, and kept abreast of the latest developments in investment instruments.

Now, diving into the key concepts presented in the article on hybrid mutual funds:

1. What is a Hybrid Mutual Fund?

  • Hybrid mutual funds are a distinctive type of mutual fund that combines various asset classes, such as stocks, fixed-income securities (bonds, debentures, treasury bills), and even real estate or gold.

2. How do Hybrid Funds Work?

  • Hybrid funds aim to generate short-term profits while focusing on long-term capital appreciation. Fund managers strategically allocate investments between equities and debt based on the fund's goals, adjusting to market changes through security trading.

3. Types of Hybrid Funds:

  • Multi Asset Allocation Fund: Must invest in at least three different asset classes with a minimum 10% investment in each.
  • Aggressive Hybrid Funds: Allocate 20-35% to debt and 65-80% to equity, offering significant profits at lower risk.
  • Balanced Advantage Funds or Dynamic Asset Allocation: Asset allocation can vary from 100% debt to 100% equity, guided by the fund's financial model.
  • Conservative Hybrid Funds: Allocate 10-25% to stocks and the rest to debt instruments, seeking returns from both components.
  • Equity Savings Funds: Use debt, equity, and derivatives for balanced risk and return, allocating 0-35% to debt and 65-100% to equity.
  • Arbitrage Fund: Utilizes the arbitrage strategy to profit from price differences between cash and futures markets.

4. Who Should Invest in Hybrid Mutual Funds?

  • Hybrid funds are suitable for conservative investors seeking low-risk opportunities and higher returns than debt funds.
  • New investors wanting significant equity exposure without assuming high risk find hybrid funds appealing.
  • Individuals with longer investment horizons benefit from the sizable exposure to stocks.

5. Benefits of Hybrid Mutual Funds:

  • Provides access to different asset classes through a single fund, eliminating the need for multiple investments.
  • Actively manages risk through portfolio diversification in non-related asset classes.
  • Offers portfolio diversification not only among various asset classes but also among their subclasses.
  • Appeals to different risk profiles by combining elements of both aggressive and moderate investing.

6. Things to Consider Before Investing:

  • Financial Objectives: Clearly understand financial goals and invest only if expected profits align with those goals.
  • Risk Appetite: While less risky than stocks, hybrid funds aren't entirely risk-free; regular portfolio rebalancing is essential.
  • Investment Horizon: Suitable for medium to long-term investors; historical performance indicates effectiveness for long-term investments.
  • Expense Ratio: Consider the annual cost (expense ratio) charged by the asset management company, aiming for lower ratios to maintain higher net asset value.

7. Conclusion:

  • Hybrid mutual funds offer diversification across various asset classes, actively managing risk and proving beneficial for investors with low to moderate risk tolerance. However, investors must carefully assess their investment horizon, financial goals, and risk tolerance before venturing into hybrid mutual funds.

I hope this breakdown provides a comprehensive understanding of the key concepts related to hybrid mutual funds presented in the article. If you have further questions or need clarification on specific points, feel free to ask.

What is Hybrid Mutual Funds? - Definition, Types, and Benefits | Kotak Securities (2024)
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