Investment has become easier than ever – one can apply for mutual funds (MF) online and bypass all hassle-free and time-consuming manual documentation processes. However, first-time investors may still find that choosing between funds is challenging. While many are familiar with equity and debt funds, they may struggle to understand a third class, hybrid funds. So, what are they? Let’s find out.
What are hybrid mutual funds?
Simply put, hybrid mutual funds are funds wherein you, as the investor invest in both equity and debt-oriented funds for diversification purposes. Since the risk is spread between different asset classes, your returns do not fall prey to market volatility. Offering the perfect blend, hybrid MFs generate higher returns than debt funds while not being as risky as equity funds.
How do these MFs work?
The aim of investing in hybrid MFs is to create a balanced portfolio. These funds help create wealth in the long run and also generate income in the short run. To this end, your fund or portfolio manager will determine the asset allocation – the share of money that goes into equity and debt-oriented funds, respectively, based on your risk profile and investment objectives.
Who should invest in hybrid MFs?
Given the nature of hybrid funds and the returns they help generate, they are the ideal choice for budding investors. Those who need a taste of the equity market but do not want to experience a total burnout given the high risk involved can invest in a balanced portfolio. Plus, the debt-based aspect of these mutual funds ensures that the investor remains safe against extreme market fluctuations. In short, those who wish to enjoy stable returns + low risk can invest in hybrid funds.
The different types of hybrid MFs
Some hybrid schemes may lean more towards the equity aspect, while some may be more debt-oriented. Based on asset allocation, hybrid funds can be classified as follows –
- Equity-oriented hybrid funds
When a fund manager invests more than 65% of the fund’s assets in equity-based funds while the rest is invested in debt-oriented funds or other market instruments, the same is known as equity-oriented hybrid funds.
- Debt-oriented balanced funds
When more than 65% of a fund’s assets are invested in debt-based funds while the remaining is invested in equity instruments or other financial investments, the same is known as debt-oriented balanced funds.
- Monthly Income Plans (MIPs)
Under Monthly Income Plans or MIPs, the funds are predominantly invested in debt-oriented funds. Only 15 to 20% of the fund’s assets are exposed to equity instruments. MIPs offer regular dividends to investors – weekly, monthly, quarterly, half-yearly, or yearly.
- Arbitrage funds
A fund manager dealing in arbitrage funds will purchase the stock during a bull market and sell it during a bear market. Meaning, they will buy a stock at a lower price and sell it at a higher price to maximise the returns on investments.
Whether you’ve decided to invest in lumpsum or SIP, choosing the right scheme based on your risk profile, investment objectives, and other key requirements is a must. Now you can make a fair comparison from the comfort of your home using investment apps like Moneyfy and choose the right schemes for investment.