Investors that allocate funds to mutual funds can generally be classified into three categories. Under the first category are the investors who are okay to take some risks and to do that, they invest in equity funds. The second one is the investors who are known for playing it safe by investing in debt funds. Debt funds are those schemes that are known for offering assured returns while simultaneously keeping money safe. In the third category are the investors who want the best of both equity and debt funds, by going for hybrid funds. In case you are seeking an investment scheme that offers the benefits of both equity and debt, hybrid funds are the solution.
In simple words, hybrid funds are a variant of mutual funds that are known for allocating funds to two or more categories of asset classes. They invest in a combination of stocks and bonds. Additionally, some hybrid funds use a broader asset allocation approach and thereby include other assets like gold, commodities, and real estate investment trusts (REITs). These funds attempt to balance allocations between different asset classes. It is done with the aim of diversifying the portfolio. The allocation of funds between debt and equity is generally decided as per the investor’s risk appetite, financial goals, and investment horizon.
How do they work?
Before going ahead and opting for this financial instrument, it is advisable to understand how hybrid funds work. Hybrid mutual funds come with the aim of achieving wealth appreciation in the long run. Apart from long-term wealth creation, these funds also try to simultaneously generate income in the short run with the help of a balanced portfolio. The portfolio manager allocates your money in varying proportions in equity and debt based on the investment objective of the fund. The manager may also opt to buy or sell securities to take advantage of market movements.
Are there any benefits associated with hybrid funds?
Here are some of the merits that are associated with hybrid funds:
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They are known for offering the perfect balance of risks and returns:
An alluring benefit of hybrid funds is that they help the investors in striking the right balance between the risk and return. Unlike pure equity funds, these funds are known for offering the stability offered by assets like debts. The presence of stability allows investors to experiment with high-return equity investments. The presence of debt serves as a cushion against the volatility of equities. Hybrid funds can bring down the risks associated with the equity component.
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Investors are provided access to multiple asset classes with a single fund:
Instead of allocating funds to different investment schemes to meet the need for different asset classes, you can enjoy the benefit of access to multiple asset classes in a single investment tool i.e., just one hybrid fund scheme.
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Funds can be easily diversified:
A hybrid fund offers investors an option to diversify their investments because they allow them to allocate funds to both equity and debt funds. Whenever there is a fall in the share prices, the debt part of these investment plans ensures stability to your portfolio. If you were to invest in a hybrid mutual fund when a market is going through a bear phase, you don’t need to worry about returns. The debt part of the scheme may ensure that these funds might be able to withstand the low-performing shocks of a stock market that is going through a rough phase.
Who can invest in hybrid funds?
Hybrid funds are considered ideal for investors that seek a stable investment option. These funds provide you with a higher income than some debt funds and because of that, they are known for attracting conservative investors. Apart from conservative investors, up-and-coming investors who are willing to expose themselves to equity markets may invest in hybrid funds. The equity part of the schemes offers the potential to earn higher returns. At the same time, the debt component of the fund serves as a cushion against extreme market fluctuations.
