Reviewed by Oct 05, 2020| Updated on
To gain diversification and reduce the possibility of a concentration, hybrid funds invest both in debt and equity instruments. A better combination of the two provides higher returns than a typical debt fund, though not as risky as equity funds. Choosing a hybrid fund depends on your risk preferences and your investment target.
Hybrid funds aim to achieve long-term asset growth and produce short-run revenue through a balanced portfolio. The fund manager allocates your money in equity and debt to varying proportions based on the fund's investment objective. The fund manager can buy/sell securities to capitalise on market movements.
Hybrid funds are seen as a more safe option than equity funds. These yield higher than real debt funds and are common among conservative investors. Budding investors willing to become exposed to equity markets could invest in hybrid funds. The presence of equity components in the portfolio provides the potential for higher yields.
At the same time, the fund's debt component provides a cushion against extreme fluctuations in the market. In this way, you receive stable returns rather than a total burnout that could occur in the case of pure equity funds.
Hybrid funds are further graded according to the distribution of their money. Some hybrid funds have a higher allocation of equity, while others attribute more to debt. Let's take a more thorough look:
a. Hybrid funds geared to equity
If the fund manager invests more than 65% of the fund's assets in equity, and the remainder in debt and money market instruments, it is called an equity-oriented fund. The fund's equity component consists of corporate equity shares across industries, such as the FMCG, finance, healthcare, real estate, automotive, etc.
b. Debt-oriented balanced funds
A hybrid fund is considered a debt-oriented fund if more than 65% is allocated to debt instruments by the fund manager. The fund's debt portion is the investment in fixed-income havens, such as government securities, debentures, shares, treasury bills, and so on. Some part of the fund would also be invested in cash and cash equivalents, for the sake of liquidity.
c. Monthly income plans
These are hybrid funds which mainly invest in debt instruments. In general, a monthly income plan (MIP) would have an equity exposure of 15-20%. This plan would enable it to yield higher returns than regular debt funds. MIPs provide a steady income to the investor in the form of dividends. Investors can choose any frequency of dividends payout, i.e. it can be monthly, quarterly, half-yearly, or annually.