Hybrid funds are mutual fund schemes that typically invest in a combination of equity and debt securities and sometimes in other asset categories such as gold. The aggressive hybrid funds are mandated to invest 65-80% of their assets in equity and the remaining in fixed income. Nitin could evaluate such funds as the markets have been near an all-time high. These also fulfil his objective of reducing risk while participating in the equity markets without sacrificing growth in the bargain. For investors, hybrid funds help capitalise on investment opportunities in the equity markets while providing the stability of debt markets, which could sustain the portfolio when equity markets correct in the interim. The importance of asset allocation cannot be overstated in scenarios where one asset class starts to appear risky. A hybrid fund offers this to Nitin in a ready format.
With equity and debt performing well in recent times, these funds have expectedly attracted investor interest. Hybrid funds are a good option for Nitin as most fund categories have defined asset allocation patterns depending on the investor’s equity (risk) preference. He might also want to consider balanced advantage funds as they are a middle-path solution. He could use the fund to take a reasonable equity exposure, with the inbuilt mechanism automatically increasing equity allocation if the market corrects. This would make it ideal for conservative investors like Nitin, who are keen on growth from equity investments, but are wary of its downside risk. Investors like Nitin, who prefer conservative growth, are approaching a financial goal, and are more likely to panic during sharp market corrections, would certainly find the risk-reward outcomes of hybrid funds more acceptable compared to pure equity in the current scenario, where the markets seem to have already run up a great deal.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
