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Things you need to know about hybrid funds or balanced funds

When it comes to mutual fund investing, investors are expected to keep a balanced investment portfolio by spreading their investments across asset classes. However, these days it is possible to gain the benefit of more than one asset class through a single mutual fund investment. Although equity and debt as an asset class have their own merits and demerits, by investing in a hybrid fund, you can get the best of both these asset classes.

What is a hybrid fund?

A hybrid fund (also referred to as a balanced fund at times), is a mutual fund scheme that spreads its investible corpus across equity and debt. Every hybrid scheme has a different portfolio composition of these asset classes depending on what the investment objective and risk profile of the fund is. For example, equity oriented hybrid schemes predominantly invest in equity related securities as opposed to debt oriented hybrid funds that invest a minimum of 65% to 80% in fixed income securities.

Things to know about hybrid schemes

Different types of hybrid schemes

If you are planning on investing in hybrid funds, it is essential for you to know all the different types of schemes available for investment so that you can consider choosing one that is ideal for their financial goals –

Conservative Hybrid Fund: A conservative hybrid fund is an open ended mutual fund scheme that invests a majority of its investible corpus in while debt.

Balanced Hybrid Fund: A balanced hybrid fund is an open ended scheme that must invest a minimum of 40% to 60% in each of the two asset classes (equity and debt).

Aggressive Hybrid Fund: Of its total assets, an aggressive hybrid fund must invest a minimum of 65% to 80% in equity and equity related instruments, and the remaining in debt.

Dynamic Asset Allocation Fund: This hybrid fund has the leeway to shift its investment portfolio dynamically between asset classes to suit the existing market conditions.

Multi Asset Allocation Fund: This is an open-ended hybrid scheme that invests a minimum of 10% in each of the three asset classes (typically equity, debt, and gold).

Arbitrage Fund: This fund tries to leverage arbitrage opportunities by investing a minimum of 65% of its total assets in equity and equity related instruments.

Equity Savings Fund: An equity savings fund is an open ended mutual fund that tries to generate returns by investing in equity, debt, and arbitrage opportunities

Offers true diversification

A hybrid fund is able to offer retail investors diversification like no other mutual fund scheme. Other schemes like equity and debt funds can offer diversification within the asset class, however hybrid funds invest across asset classes, thus balancing the investor’s portfolio across fluctuating market cycles. The equity component of the hybrid funds tries to take higher risks to take risk adjusted returns whereas the debt component tries to protect the portfolio from market volatility and otherwise generates stable returns.

Investors can start a SIP in hybrid funds

One of the easiest ways to invest small sums for a longer duration with hybrid funds is via a Systematic Investment Plan. SIP is a simple and effective way to ensure that you are able to save enough at regular intervals and eventually be able to build a solid corpus. SIPs are highly flexible in nature which means the investor can decide the monthly investment SIP sum and then continue to invest this amount in the hybrid fund every month on a fixed date. Investors who aren’t sure about how much they must be investing in for long term wealth creation can also use the SIP calculator, a free online tool that any layman can use.