Many investors aim to diversify their portfolios to hedge risk and maximise returns. Investing strategically across different asset classes such as equity and debt allows you to build a solid portfolio that can help you meet your financial goals without being too impacted by changing market conditions. One of the easiest and most convenient ways to add diversification to your portfolio is to invest in hybrid mutual funds.
Hybrid mutual funds are a type of mutual fund that invest in both equity and debt. Such funds aim to find a balance between capital appreciation through stocks and capital preservation through fixed-income securities. Here are some things you should know about them.
1. Hybrid funds are of various types
Based on their asset allocation, hybrid funds are of seven types – conservative hybrid fund, balanced hybrid fund, aggressive hybrid fund, dynamic asset allocation or balanced advantage fund, multi-asset allocation fund, arbitrage fund, and equity savings fund. For instance, in a conservative hybrid fund, the maximum allocation to equity can be only 25%, while in a dynamic asset allocation fund, equity allocation can be up to 100%.
2. The risk and return depend on the equity exposure
As equity is an asset class known for higher risk and higher returns, the risk-return profile of your fund will depend on how much equity exposure it has. So, for funds such as conservative hybrid funds, this will be low. But for an aggressive hybrid fund, it will be high. When choosing a hybrid fund, you need to examine your risk tolerance and your portfolio’s current asset allocation to determine which fund is the best for your next investment.
3. Hybrid funds provide both growth and income
Stocks are known for providing capital appreciation through the growth in their value or price. Fixed-income securities, on the other hand, offer investors a regular, fixed income through interest. Since hybrid funds invest in both stocks and fixed-income securities, they aim to provide both growth and income to investors.
4. Read the scheme information document
Every hybrid mutual fund comes with a scheme information document that discusses the proportion of equity and debt that will be held by the fund. The Securities and Exchange Board of India (SEBI) has stringent guidelines when it comes to the maximum and minimum equity and debt exposure for different hybrid funds and each fund has to comply with that.
Hybrid funds can be a great investment choice as they allow you to get the best of both worlds – equity and debt. Most hybrid funds strategically change the allocation across the two classes depending on the market conditions and the portfolio exposure limits. This way, the ups and downs of different markets arecapitalised on and hedged respectively, setting up your fund for good returns. Hence, in addition to equity funds and debt funds, you should consider adding a few hybrid mutual funds to your investment portfolio.