Why Are Hybrid Funds Preferred Over Equity Funds?

Updated on:  

08 min read

We all are unique in our ways. The same uniqueness stands valid when it comes to investments. Generally, each investor will have their risk appetite, amount to be invested, the time interval between investments, financial goals, and product preference to reach the goals. Some may have long-term goals, while others may have short-term goals.

Mutual funds have a wide range of options that suit all kinds of investors. For example, those who dare to take a high risk to gain high returns choose equity funds. People who don’t dare to take the risk and prefer capital security over returns. Such people usually go for debt funds. 

How about people who fear losses and avoid equity funds and are not happy with just the stable returns on their investments? This is where hybrid funds come into play.

Hybrid funds – What you should know?

As stated earlier, hybrid funds invest both in equity and debt instruments. Hybrid funds are internally designed so that the debt component reduces the risk involved while the equity component builds wealth. 

What are equity funds?

Equity funds are a type of mutual funds that invest most of the corpus in equity and equity-related instruments. They come with a high degree of risk. Though every investor is advised to invest in equity funds, the capital share you must invest in equity funds varies based on your age, financial goal, and risk tolerance levels.

If you are a 22-year old with a long-term goal and no immediate commitments, you can invest up to 80% of your corpus in equity funds. On the other hand, if you are a 30-year old who plans to fulfil short-term commitments, you can invest up to 20%-30% of the corpus in equity funds, so you don’t have to deal with losses due to sudden market fall.

Why investors prefer hybrid funds over equity funds?

There are many investors out there who prefer hybrid funds over any other types of mutual funds. This is because hybrid funds invest in both equity and debt funds to moderate the risk. This strategy is in line with the actual investment philosophy that we know, i.e. diversifying your investment to balance out the risks involved and make the most of the market volatility.

When should you choose hybrid funds?

Hybrid funds can be the right investment option when you foresee interest rates going down, and equity funds are the right option when interest rates are rising. 

Consider Ms Sonu is a 23-year old salaried employee and wishes to purchase a car in four years. She wants to buy a car for the cost of around Rs.4 lakh. She will be able to invest up to Rs.7,000 per month for this sake. 

She invests in hybrid funds to achieve this goal as they are safer in comparison with equity funds. Also, they provide higher returns as compared to debt funds. Hybrid funds can be viewed as a popular investment product among conservative investors.
According to our SIP calculator, the maturity amount after four years of SIP will be Rs.4.33 lakh, where the principal amount is Rs.3.36 lakh and the returns gained is Rs.96,843. The returns are calculated at 12%.

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