Add Hybrid Funds to Your Portfolio

Every ardent cricket fan knows that one cannot make a great team with only super batsmen. Similarly, an all-star team of bowlers can take the wickets of an opponent but won’t win the match when it comes to scoring runs. This is why successful teams require a delicate mix of skills. The story is not different for your mutual fund investments. Hybrid Funds are mutual fund schemes which invest in more than one asset class i.e. equity, debt and other asset classes so that the risk involved is minimised and the return potential is optimised. In doing so, hybrid funds offer investors the best of both worlds as such investment avenues possess the potential to generate relatively better returns than plain-vanilla Debt Funds while being less risky than equity funds.

Multiple Benefits — Hybrid mutual funds offer you four distinct advantages. One, the presence of two or more assets makes such a fund imbibe the best qualities of all asset classes, while reducing the downside of each asset class. As a result, investor experience in hybrid funds is much better than single asset-class dominant funds. Furthermore, hybrid structure ensures stability of portfolio returns. For example, if the fund invests in equity and debt, even if there is a sharp correction in equities the downside is protected due to the presence of debt.

Two, hybrid funds are anti-concentration and prodiversification. The nature of investment portfolios of hybrid funds means that they offer diversified exposure to both equity and debt markets. This approach reduces return volatility and helps investors enjoy the fruits of investing without much trepidation. Three, hybrid funds are ideal for medium-term goals. Usually, equity funds are not suitable for short-term goals due to variation of returns over shorter periods of time. Debt funds are an ideal fit, but they may not be able to beat inflation.

Enter hybrid funds. Owing to the equity exposure there is growth to the portfolio which gives the ability to beat inflation while ensuring capital protection on account of debt exposure. Four, hybrid funds score very high on convenience. Such products save investors the hassle of allocating exposure to each asset class separately while reducing the cost involved for investing in each asset class-based mutual fund. In short, a hybrid fund removes multiple choices and makes investing easy.

Choices Galore — There are many types of hybrid funds and this mix varies based on their asset allocation. Investors should choose a hybrid fund which suits their risk appetite, time horizon and investment objective.
■ Aggressive Hybrid : These funds have the potential to generate relatively better returns due to higher exposure to equities.
■ Conservative Hybrid : These funds display lower volatility and are apt for risk-averse investors.
■ Balanced Hybrid : Right in the middle of aggressive and conservative hybrids, these bring the best of both worlds to investors.
■ Equity Savings : Investing in equity, debt and arbitrage opportunities, such funds help in long-term wealth generation.
■ Arbitrage : These offer a better than debt solution by investing in arbitrage opportunities.
■ Dynamic Asset Allocation | Balanced Advantage : Such funds are suitable for investors looking for better risk-adjusted returns irrespective of market conditions.The allocation between equity and debt here is dynamically managed basis the changing market conditions.
■ Multi Asset : With exposure to at least three different asset classes and more, this fund brings in flavours of various asset classes through a single fund.

Final Take
The three-year average returns of hybrid funds across subcategories (except arbitrage) ranges from 7 to 13 per cent CAGR, five-year gains are between 6 to 9 per cent and 10-year appreciation ranges from 7 to 12 per cent, as per Value Research data as on March 2, 2023. Hybrid funds invest in more than one asset class depending on the investment objective of the particular scheme. In doing so, they may invest in a mix of equity, debt, gold, cash and other such asset classes. The goal is to generate optimal risk-adjusted returns based on any market condition. Given the unique nature of such products, hybrid fund offering is ideal for first time investors who may want to test the waters in the mutual fund field.

The writer is Managing Director, Future First Financials (P) Limited ■ Email : futurefirstinv@gmail.com ■ Website : www.futurefirst.co.in