Before investing in any type of investment scheme it is better to understand all the aspects of it. When you know the investment product is detail, making an investment decision becomes simpler. There are thousands of investment products available for investing, but one should only invest depending on their risk appetite and investment objective. It is necessary that investors consider schemes whose investment objective aligns with that of theirs. Some investors want to benefit from multiple asset classes by investing in just one investment product.
Such investors can consider investing in hybrid mutual funds.
What is a hybrid fund?
We all know that equity mutual funds predominantly invest in the stock market. Debt funds invest in fixed income securities and debt related instruments to generate stable returns. A hybrid fund is an open ended mutual fund scheme which invests in both equity and debt for generation of capital appreciation.
Hybrid funds are largely categorized as equity oriented and debt oriented. An equity oriented hybrid fund has more exposure to equity markets and minimal investments are made in debt instruments. The risk in equity oriented hybrid funds are high but they also hold the potential to deliver better returns than debt oriented hybrid funds. On the contrary, debt oriented hybrid funds aim to deliver stable returns without taking higher investment risks.
Reasons to start investing in hybrid funds
If you are skeptical about investing in hybrid funds, here are 5 reasons why you should –
- Good risk returns tradeoff
The biggest advantage of a hybrid fund is that it has the potential to offer the best risk adjusted returns. Based on the investor’s risk appetite, they can choose if they want to invest in an aggressive hybrid fund or a conservative hybrid funds. A conservative scheme will offer steady returns with lesser investment risk. On the other hand, an aggressive fund may need investors to have a very high risk appetite, but it also holds the potential to offer far better returns.
- Diversification like no other scheme
Mutual funds like equity funds invest in a basket of securities belonging to various companies but they can’t diversification in terms of asset allocation. Hybrid funds invest in both equity and debt. Hybrid funds offer the benefit of multiple asset class by adequately allocating assets to equity and debt instruments. In volatile markets when stocks are underperforming, the debt component provides the necessary cushion while delivering stable returns. On the contrary, the when the share prices increase the fund manager may sell stocks to book profits. Since equity and debt have an inverse relation, when the markets are low debt provides cushion whereas when the markets are high the equity component generates returns for the scheme.
- Ideal for ‘know nothing’ investors
Investors who wish to get the taste of how equity markets function with some capital protection can consider investing in hybrid funds. This way they will understand how markets impact the performance of their underlying securities without facing any noticeable losses.
- Investors can opt for a SIP option
The best way to invest in hybrid is by opting for the SIP investment option. Systematic Investment Plan (SIP) is an investment approach where the mutual fund investor invests fixed sums at regular intervals in mutual fund schemes. The investor can protect their overall investment sum by only investing a small portion of it at regular intervals via SIP.
- Low expense ratio
Although hybrid funds are active funds, the fund manager has very little active participation. Most fund managers invest the fund’s equity portfolio in large cap which is the safest among other market caps and requires less portfolio management.