What Makes Hybrid Funds so Attractive?

Mutual Funds

Mutual Funds

Most investors are well versed with the terms debt funds and equity funds in plain vanilla standings. But what happens when you combine the two? It produces a new line of investment – hybrid funds. Hybrid funds, also known as balanced funds, combine the long-term capital appreciation potential of equity along with the regularity and safety of debt funds. In this article, we will understand what makes these mutual funds so attractive among retail investors.

What are balanced mutual funds?

Hybrid funds or balanced funds are a type of mutual funds that offers the mix of equity and debt funds in a single mutual fund scheme. In short, these mutual funds offer the best of both worlds – equity and debt, in a single fund. Balanced funds often comprise of different components including a stock component and a bond component, and sometimes a money market component as well. Balanced funds aim to offer high returns such as equity funds, and also try to diminish the risk factor through their debt component.

Types of hybrid funds:

Hybrid or balance funds are categorized into five main categories, mainly:

  1. Equity saving fund
  2. Aggressive hybrid funds
  3. Dynamic asset allocation funds (DAAF) or Balanced advantage hybrid funds
  4. Multi asset allocation hybrid funds Conservative hybrid funds
  5. Arbitrage funds

What makes hybrid funds so attractive?

Hybrid funds are quite popular among retail investor for a number of reasons. Some of them are:

  1. Diversified investment portfolio
    One of the biggest reasons why several investors invest in hybrid funds is that an investor does not has to invest in different securities and types of investments to diversify their portfolio. Balanced funds do that for you by offering you both stock and bond component in a single fund.
  2. Hedge against inflation
    Hybrid funds helps to hedge an investor’s portfolio against the negative effects of inflation. This is because a diversified portfolio not only helps with cutting down the volatility, but also offers protection against inflation.
  3. Re-balanced the fund’s composition

While investing in the stock market, you might come across instances when the debt markets are heavily overrated than the equities, or vice versa. While equity funds do not have the liberty to rebalance their equity exposure and exceed a certain limit due to the norms set by the SEBI (Securities and Exchange Board of India), a fund manager of balanced funds can change the asset allocation of the fund as and when needed. This also provides an investor with an opportunity to reduce their risk profile by juggling among different asset allocation of asset classes.

  1. One-stop solution
    If we weren’t apparent yet, balanced funds aim to offer one-stop solution to all its investors. You can enjoy the benefits of wealth creation opportunity and safety of equity and debt funds respectively through these mutual funds.

So, now that we have laid the importance of owning balanced funds in your investment portfolio, what are you waiting for? Invest in hybrid funds and diversify your investment portfolio. Happy investing!

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