You've probably heard of equity and debt funds, but you've probably never heard of a hybrid fund. What are hybrid funds, exactly? Hybrid Equity Mutual Funds, as the name implies, invest in a variety of asset classes to meet the needs of investors with varied risk tolerances. The investments are often made in a combination of equities and fixed-income securities.
WHAT IS A HYBRID FUND?
Hybrid funds come in a variety of shapes and sizes. An equity-oriented mutual fund is one that invests a significant amount of its assets in stocks. A debt-oriented fund is one that invests a significant amount of its assets in debt.
An equity-oriented fund will primarily invest in the stock of firms in various industries, such as pharmaceuticals, information technology, infrastructure, and mining. This type of fund delivers larger returns, but it also comes with higher risks. Fixed-income instruments such as government securities, Treasury bills, private company debentures, and certificates of deposit will be the focus of a debt-oriented fund. The risk is smaller, and the returns are higher.
Balanced funds, as they are known in India, invest in a combination of equity and debt, usually in a 60:40 ratio. This ratio, of course, has a lot of variants. A cautious fund will likely invest less than half of its assets in stocks, whereas a higher-risk fund may spend up to 70%. Naturally, a balanced fund with a larger stock component will be riskier than one with a higher debt component.
Investors can pick a combination of equities and fixed income instruments in a balanced fund based on their risk tolerance and investment objectives. For example, a monthly income plan (MIP) invests approximately 80% of its capital in debt and the remainder in stocks. This provides investors with a steady income while also allowing them to profit from the higher returns given by the stock market.
The arbitrage fund, which takes advantage of price disparities between the derivatives and cash parts of the stock market, is another type of Hybrid Equity Mutual Funds. However, arbitrage opportunities may not always exist, thus these hybrid mutual funds invest a portion of their assets in fixed income instruments to assure consistent returns to investors.
The dynamic asset allocation fund is another form of hybrid mutual fund that adjusts the mix of equity and debt in its portfolio based on market conditions. When prices are low, fund managers invest more in stock, and when prices are high, they invest less. This has the benefit of lowering volatility, which makes a hybrid fund like this appealing to risk-averse investors. Returns will be determined by the fund manager's abilities and his ability to assess conditions.
A multi-asset fund is a hybrid mutual fund that invests in a variety of assets such as stock, debt, and gold. Depending on your risk appetite, they might be aggressive or cautious. This sort of aggressive hybrid mutual fund will put the majority of its money into stocks. Visit the website of My First Crore and learn more about Portfolio Management Services online.
