In the ever-evolving world of investment, hybrid funds offer a balanced and flexible approach for investors looking to gain exposure to both equity and debt instruments. These funds are particularly suited for individuals who seek moderate risk and stable returns, combining the growth potential of stocks with the stability of bonds.
– What are Hybrid Funds?
A hybrid fund is a mutual fund that invests across multiple asset classes, such as equity, debt, gold, or real estate. These combinations can vary—like equity and debt or even a mix of three. Each scheme follows a specific investment goal, which determines how the assets are allocated and in what proportions.
– Types of Hybrid Funds:
Balanced Hybrid Funds: Balanced funds distribute their assets fairly evenly between equities and debt, typically maintaining 40% to 60% in each. This mix helps investors benefit from growth while also generating steady income.
Aggressive Hybrid Funds: These funds put between 65% and 80% of their money into equities, with the remainder in debt instruments. They aim for higher returns, making them suitable for investors who can handle greater market fluctuations.
Conservative Hybrid Funds: With 75% to 90% of the portfolio invested in debt and only a small portion in equities, these funds are designed for those who prioritize safety and income over high returns. They’re ideal for risk-averse individuals.
Dynamic Asset Allocation Funds: These funds don’t stick to a fixed split between equity and debt. Instead, they actively change the asset allocation depending on market trends and valuations. Fund managers aim to reduce risk and boost performance by adjusting the mix as needed.
Let’s see how Hybrid Funds have acted as a cushion against market falls
| Fund Category | 1Y avg. return (%) | 1Y draw-down (%) | 3Y avg. return (%) | 3Y draw-down (%) | 5Y avg. return (%) | 5Y draw-down (%) |
| Flexi-Cap | 15.3 | -30.2 | 12.7 | -6.8 | 12.5 | -1.7 |
| Aggressive Hybrid | 13.3 | -24.2 | 11.9 | -4.8 | 11.8 | -0.3 |
| Balanced Hybrid | 10.6 | -14.5 | 9.6 | -0.9 | 9.4 | 2.1 |
| Conservative Hybrid | 8.6 | -4.7 | 8.4 | 2.2 | 8.5 | 4.4 |
As per the above data the losses during market downturns are typically less severe than those of pure equity flexi cap funds.
The data in the above table is based on the rolling returns over the last 15 years for different time periods. Category average for regular plans considered.
– Let us see an example of lumpsum investment:
Investment Details:
| PARTICULARS | VALUE |
| Lumpsum Amount | Rs. 25,00,000 |
| Tenure | 5 Years |
| Expected Rate of Return | 10% |
Investment Result:
| PARTICULARS | VALUE |
| Total Amount Invested | Rs. 25,00,000 |
| Tenure | 5 Years |
| Total Future Value | Rs. 40,26,276 |
5 Years of Lumpsum Investment in hybrid funds:
| Scheme Name | Category | Lumpsum Amount (Rs.) | Tenure | Current value (Rs.) | Return (%) | Volatility |
| Kotak Equity Arbitrage Fund | Arbitrage | 25,00,000 | 5Y | 32,90,842 | 5.65 | 0.94 |
| Quant Multi Asset Fund | Multi Asset Allocation | 25,00,000 | 5Y | 1,00,45,480 | 32.05 | 12.72 |
| HDFC Balanced Advantage Fund | Balanced Advantage | 25,00,000 | 5Y | 83,74,176 | 27.33 | 11.31 |
| Bank Of India Mid & Small Cap Equity & Debt Reg Gr | Aggressive Hybrid | 25,00,000 | 5Y | 86,93,925 | 28.29 | 19.37 |
| Edelweiss Balanced Advantage Fund Reg Gr | Dynamic Asset Allocation | 25,00,000 | 5Y | 54,43,425 | 16.83 | 10.93 |
| Mirae Asset Equity Savings Fund | Equity Savings | 25,00,000 | 5Y | 49,94,480 | 14.84 | 6.86 |
| SBI Conservative Hybrid Gr | Conservative Hybrid | 25,00,000 | 5Y | 45,55,230 | 12.74 | 4.11 |
– Importance of Hybrid Funds:
Diversification in a single fund: Hybrid funds invest in a combination of asset classes—typically equity and debt. This diversification reduces the overall risk of the portfolio, as the performance of one asset class can offset the volatility of the other.
Balanced Risk and Return: They offer a middle path between high-risk equity funds and low-return debt funds. This balance makes hybrid funds suitable for investors with moderate risk tolerance.
Reduced Volatility: The debt component helps cushion the impact of market downturns, making hybrid funds less volatile compared to pure equity funds. This stability is especially valuable during uncertain market conditions.
Professional Asset Allocation: Fund managers actively manage the mix of equity and debt based on market outlooks and valuations. This dynamic approach can help optimize returns while managing risk.
Ideal for New or Conservative Investors: For investors new to mutual funds or those with a conservative approach, hybrid funds provide an easy entry point into the market with controlled exposure to equities.
Income and Growth Potential: The equity portion offers the potential for capital appreciation, while the debt portion can generate regular income. This dual benefit makes hybrid funds attractive for long-term financial planning.
Tax Efficiency (in certain types): Some hybrid funds, like aggressive hybrid or arbitrage funds, are taxed as equity funds, which may offer favourable capital gains treatment compared to debt funds.
Conclusion:
Hybrid funds present a compelling investment option for those seeking a balance between growth and stability. By blending equity and debt in varying proportions, they offer diversification, reduce portfolio volatility, and provide more consistent returns across market cycles. The data clearly shows that hybrid funds tend to cushion the impact during market downturns while still delivering competitive long-term performance. Whether you’re a first-time investor testing the waters or a seasoned one aiming to reduce risk without sacrificing returns, hybrid funds offer a flexible, professionally managed, and tax-efficient way to achieve financial goals. In an unpredictable market environment, they stand out as a resilient and reliable choice for building wealth.
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The article is authored by Ms. Ritika Sharma from Team RichVik.