There are plenty of investment options under the mutual fund spectrum, however, investors should first understand their risk tolerance before investing. There are two broad categories of investors – first ones are those who have a very high risk tolerance and do not mind investing in equity schemes that have a high risk returns tradeoff and then there are those who are completely risk-averse and hence wish to invest in less volatile investment schemes like debt funds. However, those who seek the best of both asset classes, such individuals can consider investing in hybrid funds.

What is a hybrid fund?

As you might be aware that equity mutual funds try to generate capital gains over the long term by predominantly investing in stocks. Debt funds on the other invest in bonds and fixed income securities like treasury bills, certificates of deposits, reserve repo, CBLO, debentures, etc. A hybrid fund, as mentioned earlier, combines the best of both asset classes by investing in equity and debt-related instruments. The investment objective of most hybrid funds is to deliver better returns than debt funds without taking higher risks like equity funds. The risk profile of a hybrid fund may vary depending on the type of scheme you invest in. 

Types of hybrid funds

The equity and debt exposure of a hybrid fund may vary depending on the nature of the scheme and its investment objective. Here are all the types of hybrid funds available for investment –

Conservative Hybrid Fund: This is a hybrid fund that invests a majority of its assets to debt while the remaining is invested in equity and equity related instruments.

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: Investors who wish to benefit from more than two asset classes can invest in multi asset allocation funds. These are open-ended equity schemes that must invest a minimum of 10% in each of the three asset classes (usually equity, debt, and gold).

Arbitrage Fund: The fund manager of an arbitrage fund tries to buy more stocks when the markets are low in one market and sells them at a high price in another market. This fund invests a minimum of 65% of its total assets in equity and equity related instruments.

Equity Savings Fund: These hybrid funds essentially try to generate returns by investing in equity, debt, and arbitrage opportunities.

Things to know before investing in hybrid funds

Investors seeking an investment scheme that offers diversification across asset classes can consider investing in hybrid funds. These funds are ideal for investors seeking returns over the medium to long term. Just because they invest across asset classes doesn’t mean investors will get assured returns. The hybrid scheme may even fail to deliver returns when the markets are underperforming. The NAV of a hybrid fund will fluctuate depending on how its underlying securities respond to market fluctuations. Investors can start a SIP in any hybrid scheme of their choice and also refer to the SIP calculator to determine the overall returns which they might fetch at the end of their investment journey. Investors are expected to seek the help of a mutual fund advisor to make an informed investment decision.