Hybrid Mutual Funds

What is Hybrid Mutual Funds?

Hybrid funds are mutual funds that invest the corpus pooled from the investors into more than one type of asset class. Typically they invest in equity and debt instruments, however a hybrid mutual funds can also use commodities, money market instruments, derivative instruments, etc. These funds aim for long term capital appreciation by taking reasonable risk. Generally, equities promote capital gains while the debt instruments reduce the volatility of the overall portfolio.

Hybrid mutual funds were previously known as balanced funds and are sometimes also referred to asset allocation fund.

Best Hybrid Mutual Funds 2024

To select a better performing hybrid fund, an investor must check every parameter concerning the performance of the fund. The risk associated must be checked carefully and can be compared with that of other schemes of the same category to choose the best one. The risk to reward ratio must be better than the peers and the performance of the fund in the past can be checked in terms of trailing and rolling returns under different market conditions. Choosing the best performing hybrid mutual funds can be a challenging task as they possess more than one asset class and have a different investment strategy. The experts at MySIPonline have selected a few schemes after intense research to allow the investors to enjoy better wealth creation opportunities in long term. The best hybrid schemes in India have been mentioned below.

How Does Hybrid Mutual Funds Works?

In a hybrid funds, the fund manager allocates the corpus into equity and debt securities according to the pre-defined investment objective of the fund. The fund manager is free to take advantage of rise and fall in any of the asset class hence the chances of growth increases. Investing in pure equity mutual funds might deliver higher returns but under negative market conditions, the NAV of such funds can depreciate sharply. In case of hybrid mutual funds, if a market is on the rise, equity allocation can be increased for the stocks with most potential while in the bearish trends of the equity market, allocation in debt securities can be increased to limit the loss and provide fixed income to balance the volatility.

Hybrid Mutual Funds Types

To suit the investment objective of various investors, while keeping the other aspects of the mutual fund into consideration, hybrid funds are available in various shapes with different strategies and objective. Each category has a divergent portfolio structure to achieve a separate goal. Although hybrid funds have a mixed portfolio, some investors may prefer a hybrid fund with higher equity allocation while some might be more comfortable with the higher debt allocation.

1. Conservative Hybrid Funds : 

   Conservative hybrid funds are also known as debt oriented hybrid fund due to higher debt allocation. These Funds have a major allocation in the debt securities and minor allocation in the equities. As per the norms of SEBI, a conservative hybrid fund has to invest 75-90% of the corpus in the fixed income securities or debt instruments while the equity allocation needs to be between 10-25%. These schemes are most suitable for investors with low-risk appetite. The returns of a conservative hybrid fund are higher than pure debt fund but it possesses slightly higher volatility.

2. Balanced Hybrid Mutual Funds :

   The new balanced category of hybrid mutual fund has a balanced portfolio which has almost equal allocation in equity and debt instruments. The range of allocation as per the norms of SEBI is 40-60% for equity as well as debt tools. The balanced hybrid category possesses a perfect balance for the risk and returns as the equity and debt tools possess equal allocation. These funds are suitable for those investors who want to keep a balance between equity and debt instruments in the portfolio.

3. Aggressive Hybrid Funds : 

   This is the most chosen category of hybrid mutual fund. These funds have a higher allocation in the equity instruments to provide high returns and lower allocation in the debt securities to control the volatility. Some of the aggressive hybrid schemes in India possess gigantic AUM as the strategy and objective of an aggressive hybrid scheme suits the majority of the hybrid investors and these funds are most suited for the Indian market. As per the regulations set by SEBI, an aggressive hybrid fund needs to have equity allocation between 65-85% and the debt allocation must range between 20-35%. These funds are suitable for investors who can take moderate to high risk as debt allocation is minor.

4. Dynamic Asset Allocation Funds : 

   In this category of hybrid mutual funds, there is no limitation for the corpus allocation between equity and debt instruments. The fund manager is free to ride the optimum means to deliver capital appreciation. Sometimes the market supports the growth of equities while at sometimes the debt tools can deliver better returns. This can be best utilised by the hybrid funds in the category of dynamic asset allocation. The fund manager can dynamically shift the allocation between equity and debt tools for superlative growth of the invested amount.

5. Multi-Asset Allocation Funds : 

   In a multi-asset allocation mutual fund, the fund manager can also choose another asset class other than equity and debt. As per the norms of SEBI, a multi-asset fund needs to have at least 10% of the corpus allocated in a minimum of 3 asset classes. Generally, the two asset class is of equity and debt while the third asset class can be either of real estate, commodities etc. These funds provide greater diversification in the portfolio ensuring consistent growth while controlling the volatility of the portfolio.

6. Arbitrage Funds :

   These funds seek to take advantage of the arbitrage opportunity or pricing mismatch on the buying and selling of an instrument on different exchanges. Generally, the equities are bought and sold on different stock exchanges taking advantage of the price mismatch. The buying and selling of the stocks are done simultaneously hence the majority of the corpus remains in cash or cash equivalent. These funds make multiple trades to generate a small bit of profit as price mismatch is of smaller difference. An arbitrage fund has to keep a minimum of 65% of the corpus for arbitrage opportunities.

7. Equity Saving Funds :

   These funds follow a mixed approach to deliver capital gains which includes equity, debt, and arbitraging opportunity. Equity savings funds are bound to invest at least 10% of the corpus in the debt instruments and arbitrages each while 65% of the corpus is invested in the equity and its derivative instruments. These funds follow a conservative approach to deliver long term gains, and are best suited to conservative investors.

Hybrid Funds in India - Why New Investors Prefer?

The hybrid mutual fund schemes in India generally tend to have higher AUM as compared to equity mutual funds. This is because the majority of the investors in India don’t want 100% of their capital to be exposed to the risk of equities and the pure debt funds do not serve the objective of higher wealth creation. Hybrid funds invests in a mixture of equity and debts, hence these funds deliver better returns than the debt schemes and possess lesser risk than the pure equity schemes. Apart from this, many of the equity-oriented hybrid funds have delivered better returns than the large-cap funds in the past. This gives another reason to the new investors to choose hybrid mutual funds.

Those who invest in mutual funds for the first time are also not familiar with the risk they can tolerate. In such a case, hybrid funds become the optimum choice for such investors as these funds have the ability to tackle the volatility in the equity market. Investors are becoming more aware of the debt tools that can reduce the associated risk in the investment which is the reason they prefer a mix of equity and debt in their portfolio.

Hybrid Mutual Funds : Tips For Investing

1. Set an Investment Goal : Investors must have an investment objective before they start investing in hybrid mutual funds. This will not only add to disciplined investing but can also ease the fund selection according to the tenure to achieve the goal. Investing without setting a goal can be hazardous and must be avoided.
2. Keep a Check on Your Risk Profile : Many new investors get attracted to the alluring returns of the high-risk funds to get rich quicker. In the unfavourable conditions, they face severe losses and scoot away from the world of mutual funds forever. Such practices must be avoided and a scheme must be chosen according to the risk profile which is in line with the investment objective.
3. Disciplined Investment is the Best Investment : Hybrid mutual funds are less risky but do possess market risk due to the involvement of equities. Under the worst case, the NAV of an equity oriented hybrid funds can highly depreciate. However, disciplined investing under such circumstances can pay out higher returns in the future as more units can be bought at a cheaper NAV.
4. Fund Selection is the Most Important Part : Selecting a better fund which suits the objective, tenure, and the risk factor is of utmost importance and must be done after a comprehensive analysis of every available fund.
5. Regular Monitoring Can Enhance the Investment : Keeping a regular check on the market trends and updates can be beneficial in making the required changes to the portfolio. Although the risk in a hybrid fund is lower but regular monitoring must be done to gain better outputs.