Hybrid Mutual Funds — Mixture is the New Flavour
Hi friends, I am really excited to take this thread of discussions on mutual funds a little further. Many of our readers have been requesting analysis or should I say practical advice so that they can decide the type of fund as well as the fund house to invest in. But as I always say, learn the trick once and it will keep you amused for your entire life. Therefore, dear readers, I would urge you to have some more patience till we at least complete the basic scan of the market to see what all types of products are available to choose from. Don’t you think that if you are aware of all types of products in the market, you will be able to make better-informed choices????? More so, if this involves your hard-earned money????? Therefore, let's resume exploring this most widely used but rarely understood asset class for wealth creation.
In the previous two blogs, we had discussed what exactly is a mutual fund, how it is managed, and how many types of these funds are available in the market. Just to recap, we had learned that based on investment instruments there are 36 types of mutual funds broadly grouped in five categories of Equity(10 subcategories), Debt(16 subcategories), Hybrid (6 subcategories), Solution-Oriented (2 subcategories), and Others which include index Fund and Fund of Funds. Of these, we already have covered the largest two categories of Equity and Debt Funds along with their subcategories in previous posts. Therefore, let's dive straight into the third category which is Hybrid Mutual Fund.
Hybrid Mutual Fund — As the name suggests, it's a hybrid between two or more asset classes. Simply speaking, the fund will have to invest your money in more than one asset class such as equity, debt or bonds, commodities such as gold, etc. It is designed to attract people who want to balance the risk of investment originating from just one asset class such as equity or gold or debt. The basic premise is to balance the volatility of the equity market with the stability of gold or debt investment. Based on the distribution of investment money in different asset classes Hybrid Funds are further divided into six sub-categories of Conservative, Balanced, Aggressive, Balanced Advantage, Multi-Asset Allocation, Arbitrage, and Equity Savings fund. At first look, these all terms appear to be highly technical and confusing but wait till you read about them ……you will be more confused as the line differentiating them is blurred as was the case in Debt Fund too. Keep in mind that any mutual fund is nothing but a financial product to suit various investors with varied fear and greed matrix and therefore in essence though all are pretty similar to each other, their yield and risk associated may vary marginally from one fund to another. Therefore, mutual fund houses are dishing out as many products as possible to lure more and more investors. Is this bad for us????????? Certainly not, based on your need and risk appetite, if you want to invest in different asset classes and you have a particular ratio for risk profiling or for likely gains ……there is every chance that you will find at least one Hybrid Mutual Fund catering to your particular needs. While discerning between various sub-categories of Hybrid Funds, the only parameter you need to keep in mind is the ratio in which these funds are investing in different asset classes. Let's just quickly run through all the categories first …….. to see what I am trying to say…..
1. Conservative Hybrid Fund — These funds have to invest at least 10 to 25% in equity and equity-related instruments and remaining in debt instruments. Since these are debt-heavy, these are sometimes erroneously confused with debt-oriented hybrid funds which existed prior to new SEBI policies.
2. Balanced Hybrid Fund — As per the new mandate it has to invest between 40 to 60% in the equity market and the remaining in debt. Basically, consider them like a see-saw between debt and equity as per market conditions. The only condition is that Arbitrage is not allowed in these schemes. We will learn about Arbitrage in just a while.
3. Aggressive Hybrid Fund — Notice carefully that almost all the schemes covered in this section are almost identical with only a difference of percentage allocation between equity and debt. In Aggressive Funds, this percentage ratio shifts to 65 to 80% in equity and remaining in debt. Since the higher allocation is there in equities, the fund is considered aggressive, which is taking higher risks for generating higher returns.
4. Balanced Advantage Hybrid Fund — This is also referred to as Dynamic Asset Allocation Fund as it does not have any limit for equity or debt. Based on market conditions, it is free to choose 100% either in equities or in debt. In this sub-category, this is my personal favorite as this fund is truly hands-off and will suit those who either due to lack of knowledge or time constraints want someone else to manage their investments.
5. Multi-Asset Allocation Hybrid Fund — These funds have to invest in at least 3 different asset classes with a minimum allocation of 10% in any asset class. This is designed for those investors who want to diversify their portfolio even beyond the Debt-Equity see-saw. Since the primary objective is wealth preservation, the yield from these funds may be lower than other funds from this hybrid class.
6. Arbitrage Hybrid Fund — First a look at what is Arbitrage, this means buying and selling at the same time. How is that possible ????? By either buying and selling in different markets or by different tools such as cash buying equities and selling derivatives in futures markets. When there are limited opportunities for arbitrage, the fund invests money in debt instruments. Therefore, it offers returns that are generally better than debt funds while providing similar safety as that of debt funds.
7. Equity Savings Hybrid Fund — Some consider this as a minor deviation of Aggressive Hybrid Fund while others an entirely different sub-category because these funds have to invest a minimum of 65% in equity and remain in debt similar to aggressive funds. However, the underlying difference is that these funds invest in equities as well as derivatives, not for arbitrage but for reducing risk by reducing directional equity exposure which makes them unique from aggressive funds.
Pro Tip: — Hybrid funds may be an ideal choice for someone who wants higher returns than debt funds but is not comfortable with the volatility of equity funds such as senior citizens investing their retirement benefits or short to medium term investing of pooled money kept aside for specific purposes such as buying house or children education. Therefore, the basic rule of investing Higher Gains = Higher Risks should never be forgotten while choosing the type of fund. Also please always check in absolute terms that how much money you are making over a fixed deposit for a similar period before selecting any debt-heavy fund as often for shorter periods the gains may not be substantial justifying additional risks. As a thumb rule equities will provide higher returns than hybrid and debt and will have most risk associated with that. However, this risk too may be managed by investing in Large Cap funds.
Whatever may be the case, you as an investor have to do your own risk analysis and only then consider all remaining options to choose the most suited fund which might give you the best returns in that category. We will cover more about the selection of mutual funds in subsequent blogs, after discussing the remaining two sub-categories of Solution Oriented and Others Mutual Funds in the next blog.
That’s all my friends, please log in again next Sunday for the fourth part of this series on Mutual Funds. Once again let me request you all to widely circulate this post so that more and more people can benefit from this. In any case, it is just about six minutes read per week, but this has the potential to change someone’s life forever by breaking the shackles of financial slavery. Please do show your appreciation by clicking the clap sign on the bottom left of the page and hit the FOLLOW button on the top right corner, if not done so already. See you next Sunday with a new post.
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