WHAT ARE HYBRID FUNDS?
It is a category of mutual fund that invests in more than one asset class. These schemes typically combine equity and debt, while some also include gold and REITs.
WHAT IS THE ADVANTAGE OF HYBRID FUNDS?
In this category, the fund manager rebalances the portfolio based on the scheme’s objective and requires no action from investors and this helps maintain asset allocation. Hybrid funds help retail investors buy a single fund instead of buying two or multiple funds. The fund manager actively manages risk by combining non-correlated asset classes.
They diversify within multiple asset classes with an aim to optimise returns with low risk. Financial planners believe portfolio risk can be reduced by combining assets that have low correlation to each other, and hence recommend hybrid funds. These funds can offer solutions to conservative, moderate and aggressive investors. There are equity-oriented schemes for risk-takers and the debt-oriented schemes are for those averse to risk and arbitrage funds for investors eyeing stable returns.
TYPES OF HYBRID FUNDS
As per regulatory guidelines, there are six categories of hybrid funds:
a)
Aggressive Hybrid Fund: Invests between 65% and 80% of its assets in equity with the balance in debt and money market instruments.
b)
Conservative Hybrid Fund: Invests between 75% and 90% of its assets in fixed income securities and the balance in equity.
c)
Balanced advantage or Dynamic Asset Allocation Fund: Invests in a mix of equity and debt depending on valuations and market conditions on a pre-decided internal investment model.
d)
Multi Asset Allocation Fund: Invests a minimum of 10% in at least 3 asset classes — typically equity, debt and gold — and alters its allocation based on market conditions.
e)
Arbitrage Fund: Simultaneously purchase stocks in the cash market and sell in the futures market to earn a spread.
f)
Equity Savings Fund: Invests in equity, debt and arbitrage opportunities in cash and derivatives equity market, with the equity and arbitrage portion constituting 65% of the portfolio
