Diversification is one of the key factors in the success of an investment portfolio. Diversification can ensure your investment continues growing while keeping it in a low-risk territory.
Many investment options can create such a balanced portfolio. Ideally, it would be best if you were looking to invest in different securities that have contrasting characters. But what if there is a fund that comes with diversification by default? Hybrid funds are such an option. Let us learn about them and the types of hybrid funds you can invest in.
What are hybrid mutual funds?
Hybrid Funds are those mutual funds that invest in more than one asset class. An asset class is a group of financial instruments with similar character. The asset classes of the depend funds depend on the fund’s theme. A hybrid fund’s most popular asset classes include debt, equities, money market instruments, etc. The main aim of these funds is to create a diversified portfolio by investing in a wide range of assets with different characteristics. Hybrid funds tend to generate higher returns than most conservative options while also trying to safeguard the fund. Let us now look at different types of hybrid funds.
Different types of hybrid funds
As the name implies, balanced hybrid funds tie to find a balance between debt and equity. These funds roughly balance their holdings in equity and debt. These funds typically have between 40% and 60% equity and debt ratios. For example, a balanced fund might consist of 60% debt and 40% equity, or vice versa, or any other mix.
Arbitrage Funds –
These funds try to produce arbitrage returns by taking advantage of the price difference of the same asset in different markets. According to SEBI instructions, arbitrage funds must invest at least 65% of their holdings in stocks and securities connected to stocks (e.g., stock futures, index futures, etc.). These mutual fund programs offer minimal risk. These funds benefit from equity taxes since 65% of their assets are invested in equity funds and securities connected to equity.
Equity savings fund –
An expansion of the arbitrage fund, equity savings funds combine stock, debt, futures, and options .accordingg to the tax categorization, these are classified as equity funds, giving you fewer tax implications. The main distinction is that lots are used to boost returns rather than Treasury instruments.
Aggressive hybrid funds –
Equities-oriented hybrid funds, often known as aggressive hybrid funds, are hybrid mutual fund schemes having a higher allocation to equity or assets with an equity theme. Equity and debt are the two main asset groups that mixed methods invest in. According to SEBI, aggressive hybrid funds must place 65% to 80% of their assets in equity or securities connected to equities. 20% to 35% of hybrid aggressive funds’ assets must be allocated to debt and money market instruments.
Conservative hybrid funds –
Conservative hybrid funds often allocate 10% to 25% of their whole corpus to equity, leaving 75% to 90% in debt. They are mostly debt funds, which is why they are referred to as conservative funds, but a tiny portion of their corpus is invested in stocks to produce additional alpha. Due to their significant debt exposure, these funds often aim to provide investors with a steady income.
Hybrid funds are a proven option for creating a diversified portfolio. Do your research and choose from the above according to your investment goals and risk appetite.