Hybrid funds are mutual fund schemes that are characterized by diversification within two or more asset classes e.g. equity, fixed income, gold etc. Hybrid funds, also known as asset allocation funds, offer investors exposure to multiple asset classes and risk diversification thereof through a single investment. There are several types of hybrid funds with varying risk levels ranging from conservative, high risk to very high risk profiles.
Hybrid funds endeavour to create a balanced portfolio to offer capital appreciation and regular income to its investors in the medium to long-term. The fund manager creates investment portfolio consisting of minimum two or more asset classes in varying proportions according to the scheme’s investment objective. Further, the fund manager also buys or sells assets if the market movements are favourable and also to rebalance the portfolio assets based on targeted asset allocations.
Hybrid funds are considered to be safer than pure equity mutual funds but a bit riskier than debt funds. Hybrid funds can offer better returns than debt funds and can be a preferred choice of low-risk, moderate or moderately high risk investors. Also, new investors who are shaky about stepping into the equity markets can go for hybrid funds as the debt component in the hybrid funds offer stability while they can test the equity ‘waters’ by not investing in the markets directly or through pure equity funds. This allows investors to make the most out of equity investments while protecting themselves against the volatility in the market.
Hybrid mutual funds offer various types of funds suiting investors risk profile, investment time horizon and financial goals. Investors with lower risk appetites can invest in funds with debt allocations, while those with higher risk appetite can invest in funds with higher equity allocations. According to SEBI, there are seven hybrid fund categories according to their asset allocation mandates (please see the table below).
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.