Hybrid Mutual Funds – Concept, Workings, Features, Types, Benefits & more

Before we hit the discussions on Hybrid Mutual Funds, first, let’s have a quick insight into what types of mutual funds are out there? 

So, in general, a mutual fund is split into three varying categories. The first mutual fund falls into the category in which an investor is ready to take higher risk to earn higher returns, e.g., investment in equities. 

The second type of mutual fund provides low returns but assures the investors that their invested amount is safe, e.g., investment in debt. 

Similarly, the third mutual fund is the Hybrid Mutual Fund. In this, an investor gets the best of both safe and risky mutual funds.  

Here, we’ll grasp more information on these funds so you can get a decent idea of which way to move.  

What are Hybrid Mutual Funds?

Investors who opt for Hybrid Funds can invest in both equities and debt assets. In this way, investors diversify their investments, which put off the ultimate risk. 

That’s why it’s a way better option than investing in only debt capital where you only get a lower return or equities where risk concern is relatively serious. 

It’s the perfect blend of the two most popular investment categories that balance their investments. Since Hybrid Funds invest in a mix of asset classes, so these funds are also referred to as asset allocation funds. 

The best thing about these funds is that they offer you, asset classes, to choose at a varying level of risk. You can choose low risky, moderately risk, and higher risky asset classes. 

That’s why it’s fully up to an investor’s personal opinion how they want to invest in Mutual Funds. These mutual funds are quite popular in India as they are best for both Risk-averse and Risk-taking investors. 

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How does Hybrid Mutual Fund Works?

As said, Hybrid Mutual Funds diversify the investment across varying asset classes in a proportion, so it keeps balancing off the portfolio.

Such as, they invest predominantly in equities and debt asset classes. Equity asset classes are the best for creating huge wealth for the future.

On the other hand, debt asset classes are the best way of generating short-term or regular income. 

Hybrid Mutual Funds provide you with a long-term advantage while investing in equities, and through debt investment, they fulfill your short-term goals. 

It helps the fund managers to take advantage of the market movements. That’s why these Funds are growing popular.

Find details of other Types of Funds here

Should you Invest in Hybrid Funds?

Well, it’s a critical question. Investing in Hybrid Mutual Funds is one of the best ways to fulfill both short term and long term investment goals. 

A risk-averse investor who wants to enjoy higher returns from equities can invest in Hybrid Funds.

Though, investors who are used to invest in debt funds can get more from these Funds’ equity powers. 

These funds consist of the perfect balance of both asset classes. It assures the portfolio’s safety; that’s why investment in such Funds can prove to be a great deal for every investor.

The market is full of twists and turns; hence, at any moment, you can incur loss or earn more out of your expectations. 

Hybrid funds sustain your steady position in the financial market. That’s why you must consider investing in them.  

Types of Hybrid Mutual Funds

Hybrid Mutual Funds are also split into some categories, so you can choose as per your preferences. Let’s have a look at these Mutual Funds types in detail. 

Equity-Oriented Hybrid Funds

Under the Hybrid Fund, if 65% of investment is made in equity assets, and the rest of the investment is made in Debt assets, the scheme will be called an Equity-oriented Hybrid Mutual Fund.

Investment in equities means you’ll be purchasing the shares of a company regardless of in whatever industry it’s operational. 

For example, the company can be operating in healthcare, finance, FMCG, automobile, or real estate sector.   

Debt-Oriented Hybrid Funds

If 65% of the investment is more debt focused, it’ll be known as a Debt-Oriented Hybrid Mutual Fund. 

The rest of the investment is made in equities or further related asset classes, indicating a higher return rate. 

Debt assets in these fund can consist of fixed-income haves, for example, debentures, bonds, bills, securities, and treasury, and so on.

These funds ensure higher liquidity in a portfolio, but higher return expectancy can drop. 

Monthly Income Plans

Monthly Income Plan also refers to as a MIP. These types of Hybrid Mutual Funds invest in Debt asset classes only. 

Though, these funds consist only a 15 to 20% proportion of the equities. It indicates the portfolio will generate a higher return than a typical debt fund. 

Monthly Income Plan generates regular income for the investors. The generated income can be in the form of dividends. 

That’s why investors are free to choose the dividend payouts annually, half-yearly, quarterly, or monthly. 

However, the growth options under MIP make it special. Thanks to the fund’s corpus that let the investment grow frequently. 

Investors can also opt for SIP and invest monthly. But don’t let any big company fool or mislead you. Few fund houses invest the majority in the debt capitals and only a few portions in the equities. 

Arbitrage Funds

Arbitrage funds are quite popular among investors as they assure higher returns. But the major problem with these funds is that they aren’t readily available. It’s like an opportunity for the investor. 

For instance, fund managers search for the stocks available at a low price in one market to sell them in another market at a higher price. 

In the lack of good Arbitrage Funds, the investments will appear like debt investments. 

Though, as compared to any option, Arbitrage Funds assure you safety just like any debt fund. But it can invite the tax-related issue similar to equities if the capital gains are held for the long term.  

Find details of all types of Debt Funds here

Things to consider before Investing in Hybrid Mutual Funds

Here are few important things you must know before Investing in Hybrid Mutual Funds.

Risk Factor

Risk is one of the most critical factors. Not just in mutual funds, but for any type of investment, it’s the most important thing to consider before. 

Though, it is just a false notion that these funds are risk-free. They come at a certain degree of risk. 

Still, these funds can prove to be less risky as compared to the other funds. Even though you’re choosing an equity-oriented hybrid mutual fund, the investment can turn out to be less risky. 

But make sure you’re connecting with the reliable fund house before investing in these Mutual Fund. 

Return

It isn’t essential that the Hybrid Fund offers you higher or guaranteed returns. Market volatility and various other factors can harm the performance of a fund. 

A drop in the Net Asset Value of the fund can prove to be a big loss. So make sure you’re familiar with this ever-changing behavior of the market. 

Even though you invest in Monthly Income Plans, it’s difficult to declare that you’ll get dividends if the market performs poorly. 

Cost

Since private Fund Houses manage your portfolio in Hybrid Mutual Funds, so make sure you consider the expense ratio first. 

The little expenses can reduce the real joy of great returns. That’s why it’s always advised to first find the best Fund House with a minimum expense ratio, so that you constantly capture higher returns. 

Investment Horizon

Since, Hybrid mutual funds invest in both equities and debt, so these are best for the medium-term investment horizon. 

For example, you can invest in these Mutual Funds for a five-year investment horizon. On top of that, if you seek risk-free but higher return options, you can choose Arbitrage funds. 

Financial Goals

Hybrid Mutual Funds can assist you a lot in fulfilling both your short-term and long-term goals. 

In a nutshell, after five years, if you want to purchase a car, you can invest in them.

Or else, if you want to collect sufficient funds to pay for your higher education, these mutual funds can be a better way to go with. 

Though, people who want to pile up wealth for retirement can opt for investing in Hybrid Funds. 

Tax on Gains

You can view this point as a little shortcoming of a hybrid fund because they are taxable like equity funds. 

Short-term capital gains can invite higher tax as compared to long-term capital gains.

Even though you’re investing in a Hybrid Mutual Fund debt component, you’ll have to pay the same tax as one pays for a pure debt fund.

Benefits of Hybrid Mutual Funds

Check out various benefits of Hybrid Mutual Funds here –

Active Risk Management

Hybrid Mutual Funds are famous among investors because of their higher risk-management abilities.

With the help of asset allocation and diversification strategy, these mutual funds provide you fruitful results. 

In a nutshell, investors can enjoy higher risk-adjusted return as it aligns debt and equities within a portfolio in an ideal proportion. This ensures enhanced profitability.  

Diversification

Hybrid Mutual Funds diversify the portfolio. Thus, varying asset classes keep drawing the desired results. Though, the assets can be split into sub-classes to ensure a well-balanced portfolio. 

For instance, Fund managers can allocate investments in the equities across large caps, small caps, mid-caps, value, and growth stocks. 

Multiple Asset Classes under a single fund

The best thing that makes Hybrid Mutual Funds stand out among other Mutual Funds is that it eliminates the hassles of investing in multiple funds. 

All the asset classes are arranged under a single mutual fund, which ensures easiness to the investors.

Varying Risk Profiles

Few investors have higher risk tolerance abilities, while few have significantly reduced risk tolerance abilities. 

That’s why these funds offer a debt-oriented, equity-oriented related mutual fund scheme to the investors. It makes the hybrid fund quite special for every investor.

Automatic Rebalancing

It’s another big advantage that investors obtain from Hybrid Mutual Funds. Thanks to the fund managers who rebalance the portfolio to keep it in a profitable condition.

It eliminates the hassle for individual investors as they don’t have any need to do it on their own. 

Buying low and selling high

While rebalancing the portfolio, fund managers adjust the asset allocation, which provides them insight into which assets’ price is falling and rising. 

So, they can purchase or sell the required assets, which is essential to keep the portfolio in a balanced position.

It makes a hybrid mutual fund quite special as you do not need to keep your eyes on every asset.

Check out all types of Hybrid Funds here

Ways to Invest in Hybrid Funds 

Not all investors are equal. Few have a tight budget, but they can manage to invest monthly, while few have enough budgets that they can invest a big portion of their savings in a Mutual Fund. 

Similarly, for investment in hybrid funds, you get two methods:

Lump-Sum Investing – Lump-sum investing in Mutual Fund refers to when investors invest a big portion of their savings. 

SIP – SIP, also abbreviated as Systematic Investment Plan, refers to the process when an investor invests in a fund in a small amount. 

He/she can invest either in regular interval, per month, or after six months. For investors with a tight budget, a hybrid mutual fund can be an ideal option. 

Hybrid Mutual Funds – Conclusion

So this is all about a Hybrid Mutual Fund. At present, as compared to other funds, Hybrid Mutual Funds are more popular. 

In particular, a risk-averse investor who wants to put off the risk possibilities can find it the best way to go. If an investor wants to earn higher returns, he can choose to invest in these Mutual Funds. 

Especially if you’re a debt-investor, it comes with an opportunity to earn returns like equities at minimal risk.

However, we can’t forget that Hybrid Mutual Funds aren’t utterly risk-free. You’ll find a certain level of risk linked to these funds. 

So make sure you’re not one of those investors who are investing in this Mutual Fund, assuming it is a risk-free option.

Yet, the benefits of investing in these funds are relatively higher. That’s why it proves to be the ideal option for you.

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