What are Hybrid Funds and Why they are Better
You are probably looking to invest in Mutual Funds which can provide you regular income as well as steady growth in your wealth at a handsome rate. For the same, you may be considering to invest in the equity mutual funds given the tremendous growth the stock market has shown over the years.
But are you aware that though the returns from the stock market are fascinating, they are equally risky too? The safer option to invest is “Hybrid Mutual Funds”. They provide adequate safety to the investor’s money along with impressive returns.
Similarly, for the safety of your funds, you may also be considering investing in bonds directly which too may not be an easy option. Hence for those, who want to invest in bonds, the best approach is to invest in mutual funds that have bonds in their portfolio.
What is a Hybrid Fund?
A Hybrid Fund is a mutual fund which invests in a balanced blend of common stock, bonds, and preferred stock with an objective of income generation and capital appreciation with low risk.
In a nutshell, Hybrid Mutual Funds provide the returns of the stock market as well as safety and regular income of bonds. Hybrid Funds are also known as Balanced Mutual Funds or Asset Allocation Funds.
How do you get returns from investing in Hybrid Funds?
Although Mutual Funds are a better and safer investment option than the stock market, they are subject to the volatility of the market. Hybrid Funds try to address this concern and provide a high and stable return.
Hybrid Funds usually invest about 60-65% of the investment amount in the equity and the remaining in debt funds (bonds). Sometimes, it may go up to 70% as well. While investing in equity, preference is given to the sector that has consistently shown high growth over the past few years and investment is done in stocks of those sectors.
Asset allocation within the sector also depends on the fundamentals of the organizations in that sector.
The top security in the sector may be allocated 10% of the total investment amount. Lesser the potential lesser will be the amount invested.
Hybrid Funds focus on investing in different sectors to create a diversified investment portfolio with minimized losses. Amount invested in bonds generally remain around 35-40% of the total money. The lesser amount will be invested in the more aggressive funds.
Investment in bonds and debt funds ensures safety and assured return for the investors.
Generally, government-issued bonds and bank bonds comprise the major portion of the investment portfolio of Hybrid Funds. However, depending upon the risk-bearing capacity of the investor, high rated corporate bonds and municipal bonds can also be included in the portfolio.
Why Hybrid Funds are better than Other Funds?
They provide certainty to returns and let your capital to appreciate which may not be possible with other types of funds. Depending on the investor’s risk tolerance, you can choose the allocation – it may be 70:30 or 60:40 equity-debt ratio or whichever is closer to your risk profile.
Most hybrid funds are flexible in how they allocate the investment amount. They keep their options open and make changes to the allocation depending on the market conditions and/or as per the regulations required. The only major concern for the investor is to check whether the tenure of the bonds is acceptable or not as long term bonds gives a better return than short term bonds.
Hybrid funds have performed significantly in recent years. They have shown tremendous returns as high as 20% or more. Their performance has come irrespective of the market conditions.
Hence, hybrid funds can be a great investment option to get the benefits of both equity and debt funds in one portfolio.