Hybrid Funds

In simple words it can be said that hybrid funds are a combination of equity and debt investments that are designed to meet the investment objective of the scheme.Each hybrid fund has a different combination of equity and debt targeted at different types of investors.

A hybrid fund endeavours to create a balanced portfolio to offer regular income to its investors along with capital appreciation in the long term.

The fund manager creates a portfolio according to the investment objective of the scheme and allocates the funds in equity and debt instruments in varying proportions. Further, the fund manager also buys or sells assets if the market movements are favourable.

Features of Hybrid Funds

The major characteristics of a hybrid fund are being explained below.

1. Mixture of Equities and Debt

In its investing strategy, it has a wide portfolio that includes both equities and debt, as well as other assets. Through a single fund, one can invest in multiple asset classes.

2. Balanced Portfolio

Hybrid funds have a well-balanced portfolio that allows them to take advantage of the best of all asset groups. Hybrid fund strives to provide larger returns with lower risks while also assisting in meeting both short-term and long-term financial objectives.

Equity components contribute to long-term wealth generation, and debt securities protect against market movements.

3. Specific Investment Combinations

Different types of hybrid funds have different equity-debt combinations. They are intended to fulfil the financial demands and investing objectives of various types of investors. It also caters to large-scale investors' risk tolerance, which ranges from conservative to moderate to aggressive. 

Types of Hybrid Funds

1. Equity Oriented Hybrid Fund: It invests at least 65% of its total assets in equity and equity-related instruments of companies across various market capitalizations and sectors. The remaining 35% is invested in debt securities and money market instruments.
2. Debt Oriented Hybrid Fund: It invests at least 60% of its total assets in fixed-income securities like bonds, debentures, government securities, etc. The remaining 40% is invested in equity. Some funds also invest a small part of their corpus in liquid schemes.
3. Monthly Income Hybrid Fund: It is hybrid fund that primarily invests in fixed-income securities and allocates a small portion of its corpus to equity and equity-related instruments.This allows these plans to generate better returns than pure debt schemes and allows the fund to offer regular income to investors.
4. Arbitrage Hybrid Fund: It buys stocks at a lower price in one market and sells them at a higher price in another. The fund manager constantly looks for arbitrage opportunities and maximizes the fund's returns.However, there are times when good arbitrage opportunities are not available. During such times, the fund invests primarily in debt securities and cash. Arbitrage funds are considered as safe as debt funds. However, long-term capital gains are taxed like equity funds.

Advantages of Hybrid Funds

As explained above the Hybrid funds have several advantages for the investors. These can be enumerated as under:

1. Access multiple asset classes with a single fund
2. Active Risk Management
3. Diversification
4. Caters to various risk profiles
5. Buying low and selling high
6. Automatic rebalancing

Automatic rebalancing is the process of bringing the investments in the portfolio back to original target allocations to maintain the risk-return profile set initially.