How To Diversify Your Investment Portfolio With Hybrid Funds

Many mutual fund investors know variants such as equity and debt funds. While equity funds invest in the asset classes referred to as equities and their related securities, debt funds allocate funds to fixed-income securities.

Yet one of the things to note about equity funds is that the revenue generated from these schemes is dependent on the equity market's performance. So, the income from this scheme might not be consistent.

Conversely, as debt funds invest in fixed-income securities, the revenue might be regular. Equity funds are well-suited for investors with a high-risk tolerance.

On the other hand, debt funds might be suitable for conservative investors. But, other than these two, there are other variants of mutual fund schemes too. One of these different types of mutual funds is hybrid funds. A salient feature of hybrid funds is that they amalgamate the best of both, equity and debt funds.

What are hybrid funds?
Investors who allocate funds to mutual fund schemes could be broadly classified into three categories. One category of investors is those who don't mind taking some risks and, based on that, sign up for equity mutual funds.

The second category consists of investors who don't want to take risks and, based on that, sign up for debt funds. But the third category has investors who wish to expose their funds to the equity market but don't want to take risks associated with equities. For that, they opt to sign up for hybrid funds.

Hybrid funds are known to invest in both debt and equity asset classes. It is done to achieve diversification and to avoid risk concentration. These schemes, a blend of the two, have struck a chord with fresh investors who, while wanting to be involved with the equity market, don't want to take on the risks that come with it. The choice of a hybrid fund depends on your investment objectives and risk preferences.

What are the different types of hybrid funds?
* Equity-oriented hybrid funds:
If the fund manager assigns more than 65% of the fund's assets in equity and the rest in debt and money market instruments, the scheme is called an equity-oriented fund.

* Debt-oriented balanced funds:
The hybrid fund scheme is a debt-oriented fund if the fund manager allocates more than 65% towards debt instruments. In these funds, investments are directed towards fixed-income securities such as debentures, bonds, treasury bills, government securities, and many more. In these schemes, a portion of the fund would also be invested in cash and cash equivalents for liquidity.

* Monthly Income Plans:
These hybrid funds focus on debt instruments. An MIP, i.e., a monthly income plan, may have approximately 15% to 20% exposure to equities. This exposure might generate revenue of higher value. Moreover, MIPs are known to provide regular income through dividends. Also, you could choose the frequency of dividends’ pay-out. It could either be monthly, half-yearly, quarterly or annually. These schemes also come with a growth option. This option allows your investments to grow in the fund's corpus. This means that MIP is not just a small, monthly income investment.

What are some of the reasons to sign up for hybrid funds?
Here are some of the reasons why you should consider signing up for a hybrid mutual fund:

These funds are suitable for new mutual fund investors: If you are new to the world of investments and are not sure which variant of mutual funds to choose, hybrid funds are preferable. That's because these schemes expose your investments to both the equity as well as the debt market. While these schemes expose your funds to the equity market, you might also avoid the volatility associated with the said market. Therefore, experts recommend hybrid funds to first-time investors, especially those considering getting involved in the equity market.

1. Funds could be allocated through the SIP route:
A benefit of this scheme is that you could pay for investment in a hybrid fund in the form of small amounts every month through a SIP, i.e., a systematic investment plan. SIP could be defined as an investment mode in which you could opt to pay for the scheme on a specific date every month.

2. These schemes also come with a debt component:
As stated earlier, these hybrid funds are an amalgamation of equity and debt funds. So, while the exposure to the equity market might be an opportunity to earn, the debt component of these schemes may serve as a cushion against the volatility of the equity markets.

Hybrid funds attempt to build a balanced portfolio to offer capital appreciation. In these funds, a fund manager tries to create an investment portfolio that consists of at least two or more asset classes in different proportions. The proportion of fund allocation to asset classes is based on the scheme's investment objective. Use Axis MF's investment app to conveniently explore and monitor such diversified fund options.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.