Hybrid funds invest in a different combination of asset investments (including equity, debt, commodities and cash or cash equivalents) to create a balanced portfolio that offer regular income along with capital appreciation in the long-term. They help achieve diversification and avoid concentration risk, i.e. offer better returns than debt funds but safer than equity funds.
Some of these hybrid funds are focused toward long-term goal-based investing, such as retirement or child education. However, these funds generally have a 5-year lock-in period, but may allow redemptions in case of emergencies with an exit load (1-3% based on investment period passed).
Hybrid funds are attractive for new investors who are unsure about stepping into the equity markets, as other assets in the portfolio (debt or gold components) offers stability while they test the equity ‘waters’. Hybrid funds allow investors to make the most out of equity investments while cushioning themselves against extreme volatility in the market.
Hybrid funds can be divided in 6 categories:
Dynamic Asset Allocation or Balanced Advantage Fund:
These schemes are truly dynamic and can shift between 100 percent debt to 100 percent equity asset class. The asset allocation is decided basis recommendation of the financial model deployed by the fund. These funds are suitable for investors who want to automate their asset allocation.
Aggressive Hybrid Funds:
These schemes are mandated to invest a minimum of 65 percent and a maximum of 80 percent in the equity asset class and 20 to 35 percent in the debt asset class. They provide a possibility of high returns at reduced risk through the small allocation to debt. They benefit from the taxation applicable to equity-oriented schemes.
Balanced Hybrid Funds:
These schemes invest a minimum of 40 and a maximum of 60 percent in both equity and debt asset classes. The objective is to generate long term capital generation through investment in the equity asset class and balance the risk through debt allocation. Arbitrage is not permitted in this category of schemes.
Conservative Hybrid Funds:
These schemes are required to invest 10 to 25 percent of their total assets in equity and equity-related instruments. The remaining 75 to 90 percent is to be invested in debt instruments. The aim of these funds is to generate income from the debt component of the portfolio and use the small equity component to provide a kicker to the overall return. It is a good option for people looking for debt plus returns and are willing to take a little extra risk.
Multi Asset Allocation Fund:
These schemes need to have investments in at least three asset classes with a minimum of at least 10 percent in each of the asset classes. These funds give the investors the exposure to investing in more asset classes, and based on the view of the fund manager, the asset allocation is decided.
Equity Savings Fund:
These funds try to balance risk and returns by investing in equity, derivatives, and debt. Derivatives reduce directional equity exposure, thereby reducing the volatility and generating a stable return. The equity asset provides growth and debt, and derivative provides the regular stable returns. These schemes invest 65 to 100 percent in equity assets and 0 to 35 percent in debt asset classes.