In Hybrid Mutual funds, the investor has a diversified portfolio, as the fund chooses to invest as we know in more than two or more asset classes example equity, fixed income, gold, etc. Hence they are better known as asset allocation funds. The investment advisors ask the investors to set the goals of investment plans what is the risk they are willing to take and their investment horizon. Everyone has unique needs and aspirations and hence we need to classify them under the high and low-risk categories.
There are various types of hybrid mutual funds with varying risk levels ranging from conservative to high and very high-risk profiles. Based on their asset allocation they can be equity-oriented, debt-oriented, balanced funds, Dynamic Asset Allocation or Balanced Advantage Fund ( that we spoke about in the first segment), or even multi-asset allocation funds.
Key Elements of Hybrid Mutual Funds
The key philosophies at the back of hybrid finances are asset allocation, correlation, and diversification.
Asset Allocation is the procedure of identifying the way to distribute wealth amongst diverse asset classes, correlation is the co-motion of returns of the assets, and diversification is having a couple of assets in a portfolio.
Investment portfolio risk can be reduced or balanced by combining assets so that the investor gets maximum returns from minimum risk. So we can choose the combinations of risk and returns.
The Fund manager further decides the asset allocation based on the fund objective and the laying market conditions.
Subcategories of Hybrid Mutual Funds
There are many types of hybrid funds, there are more than 100 hybrid schemes available which itself can be overwhelming for the investor. They offer different types of funds suiting the risk profile of the investor, time of investment, and financial goals. Those who are low risk may choose debt allocations while those who have the palate for higher can go for higher Equity allocations.
SEBI Categorises Hybrid Mutual funds into 7 types based on the asset allocation percentage mandates:
1) Balanced Hybrid Funds:
Balanced funds as the name says, are a balance of investments in Equity and Debt with an investment ratio of 50:50. The risk here is high for the investors. In this category since there is considerable exposure to equity compared to Conservative funds, they may fetch higher alpha and are highly volatile to market fluctuations. The ideal investment time horizon is 3+ years.
2) Aggressive Hybrid Funds:
As goes the name these have an aggressive approach and are open-ended scheme that invests principally in equity and related instruments. 65% to 80% of the assets are invested in equity and the rest 20% to 35% is in debt and money market instruments. Therefore these are relatively exposed to higher risk and hence generate better returns. The ideal investment time would be 3+ years.
3) Conservative Hybrid Fund:
The ratio of allocation between Equity and Debt is 75 to 90% in Debt and equity exposure is between 10 to 25%. Depending on the directive it could invest the debt portion in Public sector undertakings(PSUs), State Government and Corporate securities, or even Fixed income generating assets such as Cps (Commercial Papers), Corporate Bonds, or other money market instruments.
It is better not to invest the emergency funds kept aside by the investors in such funds. These are better than Aggressive Hybrid Funds and are a good option for investors who prefer low risk.
4) Balanced Advantage Funds or Dynamic Asset Allocation Fund :
Please refer to the Segment I article for detailed information.
5) Equity Savings Fund:
These funds invest a minimum of 65% of their assets in equity, arbitrage opportunities in the cash and Equity derivatives from one or more equity securities (for example Futures and options), and a min of 10% in debt. The Risk is moderately high, they aim to generate income by investing in arbitrage opportunities, and with considerable exposure to the equity, they can help generate long-term income. The ideal period of investment is 2 to 3 years.
6) Multi-Asset Fund:
These funds invest in the usual Equity, debt, and also a part of the investment in Gold. A minimum of 10% is invested in all three asset classes. The advantage is that gold being in the portfolio has a negative correlation where one variable moves in the opposite direction as another which helps limit losses when prices of one fall and the other one rise to a certain degree. The risk in this fund is very high.
7) Arbitrage Fund:
These funds try to make profits from price differences between 2 markets or underlying assets in the contrasting capital market segments. They are usually the cash market and the futures market where cash is bought from the stocks purchased and later sold in the futures market. The equity and related securities exposure is 65% and the rest is in Debt and money market instruments. The max limit for investing in debts is 35% here. These are low-risk investments and are suitable for low-risk appetite investors.
In Conclusion:
Hybrid mutual funds are considered to be better than equity funds but a bit riskier than Debt funds. There are various schemes to choose from for each investor based on their risk appetite. For those who are not sure to step into the equity market, hybrid mutual funds as a debt component are less risky and can protect themselves from market fluctuations. For those who like to take moderate to high risks, looking for relatively better returns on investment there are fund managers who are better apt at handling the portfolio. So are you ready to diversify your portfolio and take on the hybrid mutual funds this season?
Do read this interesting article: Declare Your Financial Independence Day – India at 75
Donald G. is the Principal Consultant at NRI Money+. He specialises in creating personalised financial plans for NRIs (Non-Resident Indians) and HNI (High Net-worth Individuals).
