Hybrid fund selection: How to choose the right hybrid fund for your investment portfolio

How to Invest in SIPWhen it comes to investing, having a portfolio with the right mix of asset classes can be a key factor in achieving financial goals. The challenge is that having exposure to equity markets alone may expose an investor to higher risks due to the market’s volatility. Similarly, not having enough equity in the portfolio may not offer the returns needed to meet the desired financial goals. This is where hybrid funds can be useful.


A category of mutual funds, hybrid funds invest in more than one asset class, including debt funds and equities, helping investors get exposure to multiple assets within the same fund. However, different types of hybrid mutual funds cater to different investors – from risk appetite to return expectations. So, how can one find the right hybrid fund for their portfolio? Keep reading to find out.


Aggressive hybrid funds   


These hybrid mutual funds invest 65-80% in market capitalisations such as large-cap, mid-cap, and small-cap and allocate the remainder to debt and other instruments.


These funds are suited for investors with aggressive risk tolerance and who can maintain a time horizon of more than 5 years. They offer higher returns with high risks, although they require patient investors as the market can be volatile for the short term; it gets the chance to rebound over time.


Conservative hybrid funds  


These funds typically invest between 75-90% of their assets in debt instruments such as corporate bonds, government bonds, and non-convertible debentures, while they allocate 10-25% into stocks.


Conservative hybrid funds are ideal for risk-averse investors who prefer regular and stable income through debt investments, alongside the potential gains through capital appreciation and dividends offered by equity investments. 


Dynamic asset allocation fund 


The fund manager managing these funds analyses the market trend and adjusts the allocation between equity and fixed income according to prevailing market conditions. 


By balancing out different asset classes, this fund category can be ideal for Investors who want to remain invested in the market yet do not want to take the risks that often come with highly volatile stocks.


Multi-asset allocation fund 


These funds must invest at least 10% in at least 3 asset classes. By combining several asset classes, the investor can benefit from diversification which not only protects against market risk, but also helps maintain a balanced advantage fund investment portfolio for more consistent gains.


These funds can be ideal for investors who want stability in their portfolio and wealth creation with diversification.


Arbitrage fund 


Arbitrage funds take advantage of the price difference of securities in different markets. By strategically placing trades that capitalise on the difference in pricing between two markets, fund managers offer access to a trading opportunity that is not easily accessible by individual investors.  


An arbitrage fund can work for investors who aim to make the most out of short-term surplus liquidity.


Equity savings fund  


An equity savings fund combines equity, arbitrage, and fixed-income securities to create a mutual fund portfolio with reduced risk. Equity securities make up at least 65% of the fund, offering a hedge against inflation, while debt and arbitrage components help to protect against downside volatility.  


These funds are ideal for investors who intend to keep a moderate risk profile while also having the potential to gain upside exposure through equities. 


So, which hybrid fund to choose?


Like other mutual fund investments, hybrid funds must be selected based on several critical parameters. Thus, after evaluating different hybrid funds and how they add value to one’s portfolio, investors should also analyse their risk appetite and investment objective along with the fund’s cost, asset allocation, past performance, and how it aligns with their financial goals.