How to curate your investment in hybrid funds for a balanced portfolio?

Achieving a balanced portfolio involves investing in funds that offer assured returns alongside those with higher risks and potential for greater returns. Hybrid funds play a crucial role in maintaining this balance. These funds combine the stability of assured returns with the growth potential of high-risk investments.

Hybrid funds typically include a mix of low-risk assets, such as bonds or fixed-income securities, and higher-risk assets like stocks. This diversification helps spread the risk while aiming for steady growth.

To include hybrid funds in your portfolio, it’s essential to understand your investment goals and risk tolerance. Allocating a portion of your investment to hybrid funds ensures a diversified portfolio that can withstand market fluctuations while maximizing returns over the long term.

Here is how to get a balanced Portfolio.

What is Hybrid fund?

Let us understand the meaning of hybrid fund. Hybrid Fund is a type of Mutual Fund designed to spread investments across both equity and debt assets within a specific ratio. These funds typically include a mix of stocks and bonds, offering investors relatively stable returns. They adhere to SEBI guidelines, ensuring that investments in each asset class stay within defined limits.

Balanced Hybrid Mutual Funds are usually tilted towards equity, constituting approximately 40-60% of the fund’s portfolio. This diversification allows fund managers to adjust investments in fixed-income securities during market volatility, providing a safety net while aiming for steady returns.

How to pick Hybrid Funds?

Navigating through the array of hybrid funds can be overwhelming for investors, given the sub-categories available. Each category serves a distinct purpose, catering to different risk profiles and investment goals.

Conservative Hybrid Funds: These funds prioritise capital safety by predominantly investing in debt instruments. With equity allocations ranging from 10% to 25%, and debt allocations from 75% to 90%, they offer stability and lower risk.

Aggressive Hybrid Funds: Ideal for investors with a higher risk appetite, these funds allocate a significant portion (65% to 80%) to equities. They suit those with a long-term investment horizon of over five years, offering growth potential while mitigating risk through a cushion of debt or liquid instruments.

Dynamic Asset Allocation Funds: With flexible allocation across asset classes, these funds are managed dynamically by fund managers, adjusting investments based on valuation models and market outlook. This category offers agility and adaptability to changing market conditions.

Multi-Asset Allocation Funds: These funds diversify across at least three asset classes, including equity, debt, commodities, gold, and international exposure. They provide investors with comprehensive diversification and are suitable for those seeking stability and growth.

Arbitrage Funds: Designed to capitalise on mispricing opportunities, these funds exploit price differentials across markets or between cash and futures markets. They offer downside protection and are managed actively to maximise returns.

Equity savings fund: These funds offer a unique blend of equity, equity arbitrage, and debt investments, aiming to maintain a minimum equity allocation of 65% for favourable taxation. With a minimum allocation of 10% in debt, these funds provide a balance between risk and downside protection, complemented by the arbitrage component.

In terms of returns, equity savings funds typically perform between balanced hybrid and aggressive hybrid funds, owing to their higher equity exposure. This makes them suitable for moderate-risk investors seeking some downside protection while being comfortable with a significant equity exposure.

Final word

Investors should align their choice of hybrid fund with their risk tolerance, investment horizon, and financial objectives. Understanding the unique characteristics and objectives of each category can help investors make informed decisions and build a well-balanced investment portfolio.