More and more people now know how mutual funds investment can be beneficial in creating wealth both over a short term and a long term. It has become necessary to help new investors understand the different types of mutual funds that one can invest in. Mutual funds, as most of us know by now, are funds that are pooled from many investors and invested collectively in securities like equity, debt funds and other financial instruments
Based on the type of instrument that the mutual fund mainly invests in, they’re classified as either purely equity funds, debt funds or hybrid funds, which is nothing but a combination of both. Read on to know more about hybrid mutual funds what exactly they are, who should invest in them, and the kind of returns that one can expect from them.
Equity funds are mutual funds that are wholly invested in the stock market. For those investors who do not want to take part in stock market trading directly, this is a worthy option that has the right amount of risk and reward.
Debt funds are a type of mutual funds where the amount you invest goes into money market securities like corporate bonds and other fixed-income securities. These types of mutual funds are ideal for investors who do not want to take any risk since these do not depend on the volatility of the stock market.
As the name suggests, hybrid mutual funds are a type of funds where a part of the corpus is invested in equity and the rest is invested in debt funds. The biggest advantage of such a fund is the diversification factor, wherein the fund is balanced in such a way that the investor gets better returns than purely debt funds but risk of equity funds is greatly minimized. The debt fund aspect of hybrid funds acts as a cushion in case the equity part doesn’t perform well.
Conservative investors or investors that are looking for an almost risk-free type of investment should invest in hybrid mutual funds. For those investors who want to minimize the risk of equity funds, while at the same time achieve higher returns via debt funds, hybrid funds are a great way to get the best of both worlds. In a hybrid fund, the debt component can act as a saving grace in case there are extreme market fluctuations that are negatively affecting the equity component.
Based on the allocation of assets within a hybrid fund they can be further classified into the following types.
These are the type of hybrid funds where more than 65% of the assets are allocated into equity while the rest is invested in debt funds and other fixed-income securities. These have excellent growth potential because of the higher percentage of the equity allocation, but at the same time have a higher risk, even though that risk is not as high as purely equity funds.
Hybrid funds where 65% or more of the funds are allocated in fixed-income securities such as debt funds, debentures and treasury bills are called debt-oriented hybrid funds.
Monthly Income Plans are a special type of hybrid funds that are predominantly invested in debt funds, say about 80 to 90%. The remaining 10-20% is invested in equity. The main feature of this type of mutual fund lies in the fact that investors are paid regular dividends either on a monthly, quarterly or annual basis. Senior citizens who are not interested much in capital gains but want a stable, steady and regular stream of income greatly favour Monthly Income Plans.
Despite debt funds being a low risk endeavour, it is always prudent to assume that any mutual funds investment, whether it is equity or debt funds, WILL have some amount of risk attached. Hybrid funds do have an equity component, the risk factor will be significant.
As far returns are concerned, the hybrid funds sit somewhere between purely debt funds and equity funds. Returns may not be as high as equity funds, bet they are somewhat higher than regular debt funds.
It is the nominal fee that is charged by the Asset Management Company. Before investing, make sure you choose a portfolio that has a favourable expense ratio.
Hybrid mutual funds are a great way for conservative investors to expect stable returns via debt funds, while at the same time take a tiny bit of risk via the equity component. Even within hybrid funds, the sheer variety of portfolios, from ones that have higher equity components to those that are predominantly debt based, offer investors plenty of options to choose from based on their risk appetite.