Hybrid funds invest in both equity and debt in varying proportions as per their mandate.
Typically, these funds can be utilised either as a hedge to equity exposure or to boost the performance potential of one’s debt portfolio.
Generally, hybrid funds invest in a mix of equity and debt, enabling an investor to gain from the benefits of both. For example, when equities are underperforming, an investor’s portfolio remains protected from volatility due to the debt exposure.
When it comes to hybrid funds, an investor generally has two choices: aggressive or conservative hybrid funds.
Aggressive hybrid funds: This is an open-ended fund and invests in a mix of equity and debt securities, with a greater portion in equity. It derives the term aggressive because equity investment ranges from 65-80% of total assets.
Aggressive hybrid funds invest in equity securities that have a high possibility of delivering substantial returns over a longer timeframe. In addition, a 20-35% debt allocation provides a cushion in case the equities experience a dip.
In case an investor is looking to grow their investment over a longer period, aggressive hybrid funds are the ideal investment option.
Conservative hybrid funds: As per its name, conservative hybrid funds follow a conservative investment strategy. This means they primarily invest in debt securities. These are regarded to be the least risky category of hybrid funds, with a majority of the funds deployed in fixed-income securities.
In order to generate stable and consistent income streams, fund managers ensure that the credit quality of debt paper is superior, resulting in lower risks. That’s exactly the reason why conservative hybrid funds are less volatile.
A first-time investor looking primarily to protect corpus through fixed-income investment, with a small exposure to the equity asset class to enhance return potential, can consider investing in conservative hybrid funds.
So, hybrid funds are known to offer the best of both worlds with debt and equity exposure. However, investors should consider investing in hybrid funds depending on their financial goals and risk appetite.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.