Many types of mutual funds are in the market, such as debt, equity, etc. However, one must carefully examine their asset allocation to reap the maximum benefit from these investments. While equity tends to give some of the highest returns, they are also quite volatile and risky. But going for safer fixed-income or debt instruments cannot help you beat inflation in the long run. This is where hybrid mutual funds come into the picture. But how does it work? If you don't know what a hybrid mutual fund is, this post will explain every bit.
A hybrid mutual fund is a fund scheme that invests in equity and debt instruments to diversify the portfolio and minimise risks. The allocation into different asset classes ensures that the fund's overall performance is balanced with the risk-return adjustment of all instruments.
Aggressive hybrid mutual funds in India are a type of open-ended fund with 65% to 80% of its allocation in equity. The rest is invested in debt and other money markets and fixed-income instruments. Over time, these hybrid mutual funds have generated consistently higher returns for investors.
These hybrid mutual funds primarily profit from capitalising the difference between the price of the cash market and futures markets' prices. The funds buy stocks in the cash market and sell in the futures market with up to 65% of the portfolio invested in equity. The remaining portfolio is invested in debt instruments and money market assets.
Conservative hybrid mutual funds in India are another type of open-ended scheme. But unlike the aggressive hybrid funds, these funds invest almost 75% to 90% into fixed-income instruments, such as corporate bonds, certificates of deposit (CD), etc. This makes the funds more suitable for risk-averse investors.
This type of hybrid mutual fund can change its asset allocation in equity and debt dynamically depending on the market volatility. The internal investment model is followed at the fund manager's discretion. So, investors looking to generate better risk-adjusted returns can opt for these hybrid mutual funds in India.
Equity savings funds of schemes invest primarily in arbitrage, debt, and equity. These funds try to make the most out of the cash and derivative market to generate income for the investors. With a significant exposure in equity, these schemes are perfect for long-term investors looking to generate substantial wealth.
Multi-asset allocation funds must invest at least 10% of their portfolio in three asset classes. The rest can be increased and reduced according to the market conditions. Typically, the instruments in which these funds invest are equity, debt, and gold.
This is a good instrument to spread your risk. Hybrid funds invest in multiple asset classes like equity, debt, gold, etc. Depending on your risk appetite, you can choose the hybrid fund that suits you the best.
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Hybrid mutual funds are also known as asset allocation funds since they can help better asset allocation. The hybrid mutual funds in India have multiple purposes, allowing investors to reap the benefits of equity and debt from a single scheme.
Balanced funds are a common example of hybrid mutual funds in India. These schemes invest about 60% in equity and 40% in fixed-income assets, such as debts and bonds.