Hybrid funds exist in a variety of sizes and forms. Fund types such as Equity Savings Fund, Balanced Advantage Fund, Aggressive Hybrid Fund, and others come in many formats. Then there are the fund sizes, which range from a 20% allocation to an equity allocation of 80%.
How Hybrid Funds Work?
Since the March 2020 lows, the stock markets have risen by more than 45 percent, with massive retail involvement in Direct Equities and Mutual Funds. When it comes to Mutual Funds, the plain vanilla Equity Funds remain the most popular investment category.
Hybrid Funds, on the other hand, are a considerably better alternative for first-time investors. The reason for this is the asset allocation strategy that these funds use. Simply put, these funds invest in a variety of asset types, including equity, debt, gold, and even foreign exchange-traded funds (ETFs). This allows you to gain from any advantage from the stock exposure while also protecting yourself from the downside by putting part of the surplus into debt instruments.
When Should You Choose a Hybrid Fund?
You have options as an investor. In reality, you have an excessive number of options. It's easy to become lost in the Hybrid Funds' 7 sub-categories when determining where to invest. To make things easier for you, we've broken down each of the Hybrid Fund sub-categories and explained why they're appropriate for your risk profile.
Conservative Hybrid Funds
Let's start with Conservative Hybrid, the most conservative of all Hybrid Funds. The Conservative Hybrid fund type invests mostly in debt securities. The equity proportion for these funds can range from 10% to 25%, while the debt allocation can range from 75% to 90%. The Conservative Hybrid Fund prioritises capital preservation, hence its asset allocation is heavily weighted toward debt securities.
These funds are appropriate for risk-averse investors who prioritise capital preservation but are ready to invest a limited portion of their portfolio in stocks to boost the fund's overall performance.
Balanced Hybrid Funds
The funds in the Balanced Hybrid category invest 40% to 60% of their assets in equities and the remainder in debt. This implies there may be 40 percent equity and 60 percent debt at any given time, or 60 percent equity and 40 percent debt, or any mixture of the two.
Balanced Hybrid Funds are appropriate for investors with a moderate risk profile, i.e., those who don't want to have too much exposure to a single asset but also don't want to have too little.
Aggressive Hybrid Funds
One of the most prominent categories in the Hybrid industry is aggressive hybrid funds. The assets under each fund category demonstrate this. The aggressive Hybrid Funds have a market capitalization of over Rs. 1,10,000 crores, while the Balanced Hybrid and Conservative Hybrid Funds have a combined market capitalization of little over Rs. 25,000 crores.
The aggressive hybrid category's mandate permits it to invest primarily in equity instruments, with an equity ratio ranging from 65 percent to 80 percent of total assets. This category is suited for investors with an aggressive risk profile and a time horizon of more than 5 years, due to the larger exposure to equity. The fund itself has various safeguards. So, even if the funds invest 80% of their assets in equities, the remaining 20% in debt or liquid instruments will operate as a buffer if the stock markets get turbulent.
Dynamic Asset Allocation Funds/Balance Advantage Funds
The ability of the Dynamic Asset Allocation Funds to move between asset classes is unrestricted by the regulator. The equity and debt allocation is "dynamically controlled." It's "managed" because you get a Fund Management Team to provide a layer of flexibility and move money between asset classes, and it's "dynamic" because the allocation is based on the valuation models they use. So, if you seek consistent returns, dynamic asset allocation funds will provide it, which is why these funds are appropriate for new investors as well as conservative and balanced investors.
Multi-Asset Allocation Funds
It can invest in at least three asset classes, with each asset class receiving a minimum of 10% allocation. Equity and Debt are the first two. There are also commodities, gold, and foreign exposure, all of which may be found in a single fund. Multi-Asset Allocation Funds are perfect for investors who are aware of the benefits and drawbacks of various asset classes and want to develop their wealth while maintaining stability and diversity.
Arbitrage funds are intended to profit from mispriced opportunities
These can occur in a variety of ways. Let's imagine the stock is trading at Rs. 150 on the NSE and Rs. 151 on the BSE. This implies that if you buy a stock on the NSE and immediately sell it on the BSE, you would have made a profit of one rupee. The cash and futures markets are another option. The current price of a security is referred to as the cash market. Investors benefit from the differential in stock price between the cash market and the futures market, which is exploited by arbitrage funds. If the stock is predicted to rise, the fund manager will purchase in the cash market and sell in the futures market at the same time, and vice versa.
Equity Savings Funds
Equities, Equity Arbitrage, and Debt are all investments in the Equity Savings Funds. This is done to assure equity taxation by keeping the minimum investment in shares at least 65 percent. In addition to the arbitrage component, these funds include a minimum debt allocation of 10%, which provides some downside protection.
Due to the larger Equity component, these funds tend to perform halfway between a balanced hybrid and an aggressive hybrid in terms of returns.
So, if you're a moderate-risk investor who wants some downside protection but is still willing to take a considerable stocks exposure, these funds are a good fit.
Kommentare