Diversification is often the key to a well-balanced portfolio. The idea is that your investment in different asset classes could mitigate if one asset class is facing losses.
Now, there are different ways to diversify your investments. But doing so manually could be hard work, and it demands constant monitoring. That’s where hybrid mutual funds come to the rescue. Read on to find out more about them.
What are hybrid mutual funds?
Hybrid funds are mutual funds that invest in multiple asset classes, including equities, debts, currencies, commodities etc. It aims to provide investors with a diversified portfolio.
Similar to regular mutual funds, hybrid funds also follow a theme, and they will have a portfolio which reflects that. Below are seven types of hybrid mutual funds.
Conservative Hybrid Funds
These are hybrid funds with up to 90% of their portfolio filled with conservative investment options like debt. Fund houses invest primarily in government securities, which offer a steady return and are risk-free. This keeps the fund conservative.
Other than debt, conservative funds tend to have REITs in their portfolio. So if you are an investor trying to avoid risk, conservative hybrid funds could be a good option.
Balanced Hybrid Funds
Balanced hybrid funds aim to keep a balanced exposure of high risk and low risk options. High risk options primarily include equities. Balanced hybrid funds usually have an equity ratio between 40% and 60%. Low risk options mainly include debt. Here, the equity portion appreciates your investment, while the debt portion safeguards your investment from risks.
Aggressive Hybrid Funds
As the name suggests, these funds are aimed at capital appreciation more than preservation. Hence, their portfolio would be majorly filled with equities, the security with the highest growth potential. Due to the same reason, aggressive funds tend to have a higher risk associated with them. Therefore, they are most suitable for investors who are looking for capital appreciation.
Balanced advantage funds
Like balanced hybrid funds, balanced advantage funds also aim to keep a balanced portfolio. But balanced advantage fund’s portfolio is more dynamic. The fund manager closely watches the market and economic situations to change the portfolio constantly. This ensures the fund remains balanced even in changing economic conditions. Hence, the fund is perfect if you are looking for balanced investment options.
Multi Asset Allocation Funds
As the name suggests, multi asset allocation funds have representation from at least three asset classes in their portfolio. Hence, this category of hybrid funds gives you the most diversification. Asset classes could include equities, debts, REITs, commodities, etc. Each class will have at least 10% representation. Some funds could even have more than three asset class representations, making it the best option if the most diversified portfolio is your goal.
Equity Savings Funds
Equity savings funds aim at capital appreciation and tax savings. 65% of their allocation goes to equities. Since they are categorised as equity funds, the returns attract lesser tax rates. Equity savings funds are the best fit for you if you want to invest long-term.
Arbitrage Funds
Arbitrage funds aim to make use of price differences in the cash and derivatives markets to gain profit. These hybrid funds take arbitrage positions in equities and REITs for up to 65% of the fund’s portfolio allocation. The remainder of the portfolio would usually be filled with fixed-income and cash equivalent instruments. Since these are categorised as equity funds, returns have lesser interest rates.
Hybrid funds are often the best choice for diversification among mutual funds. Make sure you talk to your investment advisor to choose a category that best fits your investment horizon.