Beginner’s Guide on Hybrid Mutual Funds

Hybrid Funds

In India, now in almost every restaurant you enter, you will be given a lot of options in the Menu Card. But have you noticed that apart from giving all the recipes in the Menu Card, there is a special option i.e. “Executive Thali”, “Deluxe Thali” etc. and most of the time you tend to order the same.

Have you ever noticed, why has this worked as a charm? Let me tell you!

Everyone in this world, looks to pay minimum price and enjoy maximum. This is what the concept behind “Thali”. It offers all the dishes in small quantities and is comparatively the same price as you order one plate of any other dish.

Similarly the concept is replicated in Mutual Funds as well. Let me explain in detail.

WHAT ARE HYBRID (MIXED) FUNDS?

Hybrid funds refers to mixture of investments in equity & debt instruments. When more than 60% of the fund has invested in equity instruments, it is called equity oriented funds. On the other side, if 60% or more is invested in debt instruments, it is called as debt oriented funds.

WHAT IS THE PURPOSE OF HYBRID FUNDS?

Investors who has a medium term investment horizon (5-7 years) and wants to earn decent returns by taking medium risk, can opt for hybrid funds. The purpose of hybrid funds it to make good returns with medium risk.

So, to understand the overall purpose of hybrid funds, you should know that it provides long term money appreciation along with short term returns (as brownies).

HOW INVESTMENT IN HYBRID FUNDS WORK?

As mentioned above that hybrid funds invests in both equity & debt instruments, the equity component can be understood as equity shares of companies across various sectors like banking, pharmaceuticals, real estate etc. Further, the debt component can be referred to as fixed income instruments like govt. securities, bonds, debentures, treasury bills etc.

It’s the skill of the fund manager to move from equity to debt or vice-versa to take advantage of fluctuations in the market.

WHY YOU SHOULD CHOOSE HYBRID, IF YOU WANT TO EARN MORE BUT WITH LIMITED RISK?

You should understand from the below theorem, where the gains from Hybrid funds are placed.

Equity Funds (HIGH RISK) > Hybrid Funds (MEDIUM RISK) > Debt Funds (LOW RISK)

SO DO WE CALL IT HYBRID FUNDS OR THERE ARE OTHER PLANS INTO IT?

To understand Hybrid Funds, you should first refer to their asset allocation criteria (where they have put their money into).

We may call it by different names based on their investment criteria as below:-

BALANCED FUNDS:

It may be called a version of Hybrid Funds. However, they usually follow an asset allocation pattern of 60/40.

REGULAR INCOME PLAN FUNDS:

For those who are looking for something in return on regular intervals invests in regular income plan funds. The asset allocation is mostly in debt instruments with a small proportion in equity. Investor has the flexibility to choose the frequency of returns i.e. monthly, quarterly, half yearly and yearly.

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Author: AK

Ankit is a part-time blogger with full-time employment in an investment bank. He is a CA with interest in personal finance topics.

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