Introduction to hybrid funds
Typically traditional investment options include investment in assets like Equities, Debt and Gold. All these different asset classes have exposure to different risk and have different return expectations. Allocating money into these asset class is usually at investors or his advisors discretion. Investors usually allocate equal amount of money into various asset classes or do it without detail analysis resulting in suboptimal allocation of funds and a portfolio that does not match investors’ risk and return expectations. Such investment could lead to a portfolio that investor may not be comfortable staying in for long term growth.
Hybrid funds as the name suggest are a blend of various asset classes. They have investments in equity, debt, gold and also in products like REITs & InvITs. The fund manager decides on the allocation within the asset class and which individual security to be added within each asset class.
Types of hybrid funds
Aggressive Hybrid Fund - Invest at least 65% in equities
Multi Asset Fund - Invest in more than two assets. Usually also invest in gold, REITs & InviTs apart from debt and equity instruments
Balanced Hybrid Fund - Investment in debt and equities is around 40%-60%
Conservative Hybrid Fund - Majority of the investment is in debt related products
Arbitrage Fund - Invest in equities and derivate products to derive a risk free return
Factors to be considered before investing in hybrid funds
Risk & Return Expectation – A hybrid fund’s performance will be somewhere between debt fund and Equity fund. In a bull cycle, hybrid fund will underperform the equities. However it will also insulate the investor from capital erosion during the bear cycle as compared to equities.
Time Horizon – Hybrid funds, one should look at these funds with a medium term time horizon (3-5 years).
Tax – An equity dominated hybrid fund (65% equity) will be taxed as equity and a fund with more than 65% invested in debt instruments will be taxed like debt.
Investment Strategy - Investors should look at the asset allocation of the particular fund. The percentage of investment in various asset classes should match investors risk and return expectations. Investors should also look at past performance of the fund and compare the same with other funds in the same category.
Benefits of hybrid funds?
Advisors prepare customized investment plan that matches that investor’s goals, risk appetite, and time horizon. Hybrid funds are a balanced portfolio which provides the upside of the equity along with the safety of debt. These funds should be ideal entry point for an investor with moderate risk appetite. The funds provide access to multiple asset classes with single fund. Fund manager automatically rebalances the portfolio as and when the markets situation justifies. Investors with various risk profile (conservative, balances, aggressive) can use these funds to meet their goals.
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