Quick Guide to Hybrid Funds - Brief Explanation and Types

Nowadays, various investors are making large investments in mutual funds while giving preference to one stop approach for purchasing the funds. Due to this perspective, hybrid funds are gaining popularity among majority of the investors. So what are hybrid funds? Let’s take a closer look at it.

Hybrid fund, also known as asset allocation fund, balanced fund or target-date fund is a portfolio devised with a mix of cash, stocks and bonds. It can be further categorized in international or domestic hybrid categories and depending on the prospectus of the fund, hybrid funds can be conservative (higher component of fixed income) or aggressive (higher component of equity).

Why invest in hybrid funds?

A number of financial advisors suggest to invest in hybrid funds as they are much safe than the equity funds. There is an array of investment options in these sorts of funds to suit diverse risk appetites. Hybrid funds are also cost effective as compared to other mutual fund investments. Moreover, they also provide a leading edge in terms of both bonds and stocks. It offers convenience to realize exposure in both bonds and equities all in a single investment.

Various kinds of Hybrid Funds

Hybrid funds can be categorized in terms of their allocation to debt and equity. Some kinds of hybrid funds have higher debt allocation, while some equity. These are:

Balanced funds

Balanced funds are the most common hybrid funds. These types of funds invest a minimum of 65% of the portfolio in equity intended instruments. Remaining assets of the fund are put in debt securities and cash. For the conservative investors who desire to get certain benefits without much risk involved, this kind of fund is an ideal investment. In balanced funds, exposure to fixed income helps in mitigating the risks related to equity.

Arbitrage funds

These are equity intended funds trying to benefit from the mispricing of stocks between the futures market and derivatives market. Manager of the fund seeks out for opportunities to increase the returns by purchasing stocks at lower prices and then selling them at increased prices in any other market. Arbitrage funds are comparatively safer and enjoy tax efficiency. However, opportunities for arbitrage are not easily accessible. Thus, in the absence of such opportunities, the funds might remain invested in cash or debt instruments. This is the reason they are regarded as hybrid funds.

Monthly income plan

These plans are hybrid funds making predominant investments in debt instruments. MIP or monthly income plan is usually exposed around 15-20 % to equities. It allows to produce increased returns than the usual debt funds. The monthly income plans offer their investors regular income by way of dividends. The dividend frequency can be opted by the investor than can be annually, half-yearly, quarterly or even monthly. Apart from the divided option, MIPs also do come with investor growth options that do not pay any sort of dividend to the investor instead there is a growth in investments in the fund corpus. Therefore, it should not be regarded as investment that offers monthly income. These are hybrid funds investing generally in debts and to some extent, equities.