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    An In-Depth Analysis on Hybrid Mutual Fund

    Published on May 28, 2020

    A Hybrid Fund can be very broadly defined as a fund that is characterized by diversification among two or more than two asset types. These are the types of mutual funds or ETFs (Exchange Traded Funds) that have their investments in different kinds of securities such as stocks, bonds, etc. Their main attempt is to increase the value of the investor through the means of either capital appreciation over time or by setting up a respectable level of returns that they are expected to achieve. The name “hybrid” is allocated to these kinds of mutual funds as they have in them a mix of elements of various types of financial instruments.

    Hybrid Mutual Funds, also known as Balanced Funds or Asset Allocation Funds, are mostly characterized by the object of being conservative, moderate, or aggressive in nature, each differing in the nature of its risks and returns proportions respectively. These balanced mutual funds are often considered an outstanding option for beginner investors that are a far better option than investment in any core type of fund.  Diversification is considered the core of the smartest investments, and it helps in reducing risks considerably, and nothing provides diversification quite as much as the hybrid mutual funds. These funds are increasing in popularity with each passing day.

    These funds are also called Asset Allocation Fund. In the investment world, Asset Allocation Funds are known to serve a variety of purposes. The most important of its characteristics being that these funds allow the investors to enjoy the option of investing in multiple classes or groups through an investment in a single fund. This provides the facility to benefit more than one fund type, with the investment money being only for one fund. This kind of arrangement not only increases the possibilities of better returns in the investment but also reduces the risks by negatively correlating the portfolio.

    Hybrid mutual funds in India today have evolved from just a modern theory to a regular practice. They vary based on their risk tolerances and can be divided as follows:

    • Blend Funds: Blend Fund or a blended fund is a type of fund that is a mixture of value and growth stocks. They are funds that offer rare diversification among popular investment styles in the market.
    • Balanced Funds: Balanced Hybrid Funds are the type of hybrid funds that follows standard asset allocation proportion, like 60:40.
    • Target date funds, also known as lifecycle funds, are the types of hybrid funds that start with a portfolio with a predominantly aggressive allocation and slowly and progressively rebalance themselves to a more conservative allocation to use at a specified date for utilization.

    There are also various other types of hybrid mf, which will be called so with only a little mixture of two or more different types of funds. However, in Blend Funds, Balanced Funds, and Target Date funds, this mixture is standardized and, therefore, can be classified. In all kinds of hybrid funds, no matter what the mix or proportion may be, the investment manager actively manages the proportions of the asset holdings within specific categories of assets in response to changing market conditions, investment scenarios, and possible asset appreciation opportunities.

    Hybrid Mutual Funds were initially introduced to overcome the drawbacks of Debt and Equity Mutual Funds. Debt Mutual Funds are the type of funds that invest primarily in debt securities such as treasury bills, money market instruments, corporate or government bonds, etc. It provides the benefit of risk aversion; however, the returns are low. On the other hand, equity mutual funds focus on predominantly investing in equity stocks and equity shares of various companies with the main aim of generating an appreciation of the investor’s capital. The returns of the equity mutual fund are much higher than that of a debt fund, but the risks are also comparatively high. With the limitations of return for debt and risk for equity, making an investment trade-off often becomes a problem. This is where Hybrid Mutual Funds come in. They provide an attractive mix of the two and offer an excellent trade-off.

    A scheme of a Hybrid fund that has 65% or more of equity is called an Equity Oriented Hybrid Mutual Fund. Similarly, the hybrid fund that has 65% or more of debt is primarily known as a Debt Oriented Hybrid Mutual Fund.  An investor can choose an appropriate mix according to his or her risk appetite and expectancy of return from the stipulated investment.

    The types of Hybrid Mutual Funds are further explained below:

    1. Equity Oriented Hybrid Mutual Fund: As explained earlier, these kinds of mutual funds have 65 % or more proportion of equity-type investments in them. They allocate more funds in purchasing equity stocks and shares of companies. While the remaining proportion of the investment is allocated to debt or other investment opportunities, this type of arrangement is mostly preferred by investors with a comparatively high-risk appetite and yield higher returns.
    2. Debt Oriented Hybrid Mutual Fund: Just like equity-oriented hybrid funds, debt-oriented funds have 65% or more proportions invested in debt securities. At the same time, the rest is allocated to equity. Also known as Monthly Income Plans, these funds allow investors a regular income in the form of dividends. These dividends are paid out on various intervals based on the investor’s choice from monthly, quarterly to half-yearly, or annually. Furthermore, it also provides for the option of reinvesting the dividends received, thus allowing the investors to appreciate their capital substantially. These types of funds are preferred mostly by risk-averse investors who like their investments to be safe but want to earn more income than debt holders.
    3. Arbitrage Funds: These are a special and unique type of instrument that buys and sells the same kinds of funds simultaneously but in different markets. They exploit the differences in trade values of the shares to earn profits from the differences in the respective trade values in different markets. Here shares are brought from the cash market and sold in the future markets, thus using the price difference to create profits.

    Hybrid Funds in India are gaining popularity rapidly for both risk-averse as well as risk-taking investors who want to avoid losses as well as earn profits. In India, investments in Hybrid Funds in Mutual Funds can be made just like any other funds following Government and SEBI Guidelines. Investors can either choose an investment agency to make the investment on their behalf, thus ensuring professionally backed experienced investments or select their investment after doing their homework. With the increasing government support to the financial investment sector investing in a hybrid mutual fund is becoming easier and almost like a cakewalk.

    Qualitative and Quantitative Aspects of Hybrid Mutual Funds:

    While selecting a Hybrid Mutual Fund India, one must analyze various quantitative and qualitative aspects. These include the risks involved, the returns from these investments, the past performance history, the growth over the years and future growth potential, the industry condition in which the funds operate, the overall public perception towards the said fund, the performance of the company over the past years and future expectations and finally the tax laws and provisions of the government towards the fund. Additionally, one must keep their financial goals and their investment time horizons in mind while making their analysis. Some of the highest hybrid mutual funds in India yield up to 10% returns. They are an excellent opportunity to invest in.

    Who should invest in these kinds of Funds?

    Hybrid Funds have this unique capability and have been designed to cater to the investment needs of a wide variety of investors. They have a huge amount to offer to both beginners as well as seasoned investors. It benefits first timers by providing them insights and giving a cushion to prevent risk while also increase returns.  For a mature investor, trading through different markets to buy and sell investments will not only increase their knowledge about various aspects of the financial markets but also provide them with vital, valuable insights. This will additionally help them identify and improve their needs as an investor.

    Thus, Hybrid Mutual Funds are the star of the hour, with investors flocking around from every corner to invest in these kinds of instruments.  With their ability to generate attractive returns coupled with asset appreciation and growth opportunities for the investors and mitigation of risks, these types of funds are ideal for investors from all sectors and age and financial health. Furthermore, investors have a wide variety of Mutual Funds to choose from depending on their profiles; each has a unique advantage to offer. Investors are required just to find their perfect synergy that will suit all their needs perfectly. Thus, keeping in mind, the Hybrid Mutual Funds’ greatest strength of the ability to diversify with just one mutual fund, investors from all works of the society have been giving it a valuable place in their investment portfolios and will continue to do so in the times to come.

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