Learn to choose your Hybrid Mutual Fund

Updated on: Jan 13th, 2022 - 5:01:18 AM

4 min read

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One of the best ways to diversify your investment portfolio is by investing in hybrid mutual funds. Hybrid mutual funds make the process of diversifying your portfolio much easier and simpler.

What are hybrid mutual funds?

A hybrid mutual fund invests in both debt and equity-linked instruments. Hybrid funds invest in government and corporate securities, treasury bills, bonds, and stocks to bridge the gap between debt and equity funds. These funds can further be classified based on their equity exposure. Investing in hybrid funds is apt for those who are ready to bear some risk in order to earn higher returns. The risk involved in investing in these funds majorly depends on their exposure to equity instruments.

Aim of the hybrid funds

The primary objective of investing in hybrid funds is to optimise the returns by diversifying the portfolio. The hybrid mutual funds are further sub-categorised based on the risk and investment objectives.

Types of hybrid mutual funds

Hybrid funds are mainly classified based on their equity exposure. Following are the types of hybrid mutual funds:

  • Equity-Oriented Hybrid Funds: As the name suggests, the equity-oriented hybrid funds invest predominantly in equity-linked instruments. The equity exposure of these funds is at least 65%. They invest in equity shares of companies in sectors such as finance, FMCG, healthcare, automobile, real estate, and so on.
  • Debt-Oriented Balanced Funds: As the name suggests, the debt-oriented funds invest mostly in debt securities. The asset allocation of these funds towards debt securities is about 60%. Debt-oriented hybrid funds invest primarily in debt securities such as government securities, treasury bills, bonds, debentures, and so on. Also, they invest in cash, and cash equivalents to offer liquidity.
  • Balanced Funds: These funds allocate at least 65% of their portfolio towards equity investments and make them eligible to be termed as equity funds for taxation. The rest 35% of the funds are used towards purchasing debt securities and cash reserves. The fixed-income securities hep in mitigating the risk involved in equity-linked investments.
  • Monthly Income Plans: This type of hybrid funds predominantly invest in debt related instruments. The equity exposure is very minimal, and it is generally restricted to around 20%. Monthly income plans pay out dividends regularly. As an investor, you can choose the frequency of payouts, and it can be monthly, quarterly, or annually.
  • Arbitrage funds: The fund manager managing arbitrage funds will try optimising the returns by purchasing stocks at a lower price in one market and selling it in another market at a higher price. You must note that arbitrage opportunities are not available regularly. If there are no arbitrage opportunities, then the fund manager will focus on generating returns through debt instruments or cash.

Factors to consider when choosing a hybrid fund

After knowing the classification of hybrid mutual funds, you need to keep the following points in mind while choosing a hybrid mutual fund:

  • Check if the investment objective of the fund is in line with your goal.
  • Know the extent of risk involved.
  • Ensure that the cost of the mutual fund units is within your budget.
  • Check for the past performance of funds.
  • Ensure that your objectives can be achieved within the investment tenure of the funds.

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