While investing in the market, one will encounter numerous investment tools. One of these investment tools is mutual funds.They are an investment product that pools money from a group of investors to purchase different securities. Through mutual funds, you can invest in various financial securities like stocks, bonds, gold and money market instruments through an investment vehicle. When you buy a unit in a mutual fund, you own a small stake in all the investments included in the fund. Mutual funds can be an ideal investment choice given their ease of use and the advantages they offer.

But it is important to remember mutual funds are not a monolith and in fact, there are numerous types of mutual funds that are available. One of them is hybrid mutual funds.

What are hybrid funds?

To put it simply, hybrid funds are a class of mutual funds that are known for investing in two or more categories of assets. These funds are known for investing in a combination of stocks and bonds. Moreover, some hybrid funds take a broader asset allocation approach and include other assets like gold, commodities and real estate investment trusts (REITs).These funds look to balance allocations between different asset classes with the aim of diversifying the portfolio. Doing so might reduce the risk factor for the investors. The allocation of debt and equity is typically decided as per the investor’s risk appetite, financial goals and investment horizon.

How do they work?

As isthe case in other financial instruments, it is always advisable to understand how hybrid funds work. Hybrid mutual funds aim to achieve wealth appreciation in the long run and even generate income in the short run with the help of a balanced portfolio. The fund manager allocates your money in varying proportions in equity and debt based on the investment objective of the fund. The fund manager may opt to buy or sell securities to take advantage of market movements.

Who are hybrid funds for?

Hybrid funds are ideal for investors who are seeking a stable investment option. Theyare known for providing investors with higher income than some debt funds and because of that, they are popular among conservative investors. Budding investors who are willing to get some exposure to equity markets may invest in hybrid funds. The presence of equity components in the portfolio offers the potential to earn higher returns. Simultaneously, the debt component of the fund provides a cushion against extreme market fluctuations.

What are the types of hybrid funds?

Listed below are some of the numerous types of hybrid funds that are available in India:

  • Conservative hybrid funds:

Conservative hybrid funds are open-ended hybrid mutual funds that are known for allocating 75-90% of their total assets to debt securities. These mutual funds are suitable for investors seeking more or less stable returns and secure investments.

  • Balanced hybrid funds:

In a balanced fund, debt and equity are mixed in specific proportions. These funds are equity-oriented with 40% to 60% equity allocation. They are seen as a stable investment option with healthy capital appreciation.

  • Dynamic asset allocation:

Also referred to as balanced advantage funds, these funds have the dynamism of moving anywhere from 100% allocation in equity to 100% in debt. Depending on prevailing market conditionsand their reading of how it will move in the coming days, fund managers determine the exposure to the different asset classes.

  • Multi-asset allocation:

These hybrid funds invest a minimum of 10% in three or more asset classes. Apart from equities and debt, it also includes asset classes like gold, other commodities or REITs. With more assets in the mix, it further diversifies your risk.

  • Arbitrage funds:

These hybrid funds are known forgeneratingincome on investment by exploiting the price differential between the cash and derivatives markets. Through an arbitrage fund, the fund manager will invest in the cash market and almost simultaneously sell in the futures market thereby limiting risk. The asset allocation is chiefly towards equities with debt investment not exceeding 35%.These funds are known for being a low-risk strategy that large corporations use to deploy excess cash in. On the flip side, arbitrage opportunities are not always easily available. In such cases, the fund manager may choose to allocate part of the funds to debt instruments and cash.

If you are seeking an investment option that comes with equity as well as debt, look no further than hybrid funds.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.