In life, we often face decisions where we must choose between two extremes. Similarly, in investing, one often encounters the dilemma of choosing between asset classes which are uncorrelated in terms of risk-return like high-risk equity, lower risk debt and hedges against inflation like commodities (gold, silver etc.) But what if you could enjoy the benefits of both, striking a balance between growth and stability? Enter hybrid funds, a versatile investment option that blends two or more of these into a single fund to balance risk and return.
What Are Hybrid Funds?
Hybrid funds are mutual fund schemes that invest in a mix of equity (stocks) debt instruments (bonds, debentures, certificates of deposit) and /or commodities like Gold, Silver, etc to achieve asset allocation and growth.These funds cater to various risk appetites and offer a diversified, flexible investment approach suitable for both novice and experienced investors.
4 Reasons to Invest in Hybrid Funds?
Hybrid funds provide several benefits:
- Balanced Risk-Return: By combining equity,debt and /or commodities, these funds offer stable returns withlower risk vis-a-vis diversified equity funds
- Diversification: Investors gain exposure to multiple asset classes without the need to manage separate investments nor worry about separate taxation of each asset class
- Dynamic Movement between Asset Classes: Professional fund managers adjust portfolios dynamically between asset classes based on market conditions, optimizing returns.
- Accessibility: Structured and diversified, they are easy to understand and suitable for all investor types.
Types of Hybrid Funds
Hybrid funds are categorized based on asset allocation.They could be equity-oriented, which have high allocation (at least 65%) towards equities as compared to debt and money market instruments. Or they could be debt-oriented that have high allocation (60-75%) to debt instruments or they could have allocation to more than two assets to include gold and /or silver, offering tailored options for various investment goals and risk tolerances:
- Balanced Advantage Funds (Dynamic Asset Allocation Funds)
These funds dynamically adjust the allocation between equity and debt based on market conditions. SEBI guidelines allow allocation to range from 0% to 100% in each asset class, making them highly adaptable.
- Risk Level: Balanced, as allocation changes with market volatility.
- Ideal For: Investors seeking a flexible, dynamic investment approach.
- Arbitrage Funds
Arbitrage funds leverage price differences between cash and derivatives markets to generate returns, with minimal equity exposure. SEBI mandates at least 65% investment in equity-related instruments.
- Risk Level: Low, as they exploit market inefficiencies.
- Ideal For: Risk-averse investors looking for equity-like taxation with lower volatility while wanting to park money for the short term.
- Multi-Asset Allocation Funds
These funds invest in more than one asset class, such as equity, debt, gold, silver, etc. A minimum of 10% allocation in each asset class ensures well-diversified portfolios.
- Risk Level: Moderate due to varied asset exposure.
- Ideal For: Investors seeking broad diversification and wanting to benefit from the potential across multiple asset classes.
- Conservative Hybrid Funds
With 75–90% of their portfolio in debt instruments and a smaller allocation to equities, these funds prioritize income generation over growth.
- Risk Level: Low, making them suitable for cautious investors.
- Ideal For: Those seeking stability of fixed income but looking for a kicker through equites.
- Aggressive Hybrid Funds
These funds allocate 65–80% of their portfolio to equities and 20–35% to debt, offering higher return potential.
- Risk Level: Moderately high to High due to significant equity exposure.
- Ideal For: Investors with higher risk tolerance aiming for long-term capital appreciation but with the stability of debt.
- Equity Savings Funds
These funds allocate at least 65% to equities, 10% to debt instruments, and a portion to derivatives for hedging.
- Risk Level: Moderately high due to equity exposure.
- Ideal For: Investors with a moderate to high-risk appetite and a2–3-year investment horizon.
Conclusion
Hybrid funds stand out as a versatile investment option, balancing growth potential with stability. Catering to a wide range of financial goals and risk appetites, they offer investors the opportunity to diversify within a single portfolio. Whether you’re a first-time investor seeking a stable option, an experienced investor exploring dynamic allocation to tackle market volatility, or a retiree looking for a relatively stable investment option, hybrid funds can meet your needs effectively.
By strategically managing market volatility, hybrid funds mitigate risks while ensuring potential gains from both equity and debt. This unique combination makes hybrid funds a compelling choice for building a resilient and growth-oriented portfolio.
Investor initiative education by SBI Mutual Fund.
