Can hybrid funds balance the risk of an investor’s portfolio?

For those who aren’t aware, mutual funds are an investment vehicle that carry a diversified portfolio. That’s because mutual funds invest across the Indian and foreign economy depending on the scheme’s nature, risk profile and investment objective. Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing net asset value (NAV).  Depending on the nature of the scheme, a mutual fund may spread its assets across multiple asset classes including equity, debt, corporate securities, government bonds and similar money market instruments.

Securities and Exchange Board of India (SEBI) the regulator of securities and commodities in India have described mutual funds as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”

SEBI has further categorized mutual funds to help investors help make an informed investment decision. Some of the major mutual fund categories include equity, debt, solution oriented (retirement, children’s fund etc.), ETF, index and hybrid funds.

What is a hybrid fund?

While equity funds predominantly invest in equity and equity related instruments, a hybrid fund invests both in equity and debt related instruments. Whether a hybrid fund will invest more in equity or debt may totally depend on the nature and investment objective of the scheme.

For example, an aggressive hybrid fund will invest around 65 to 80 percent of its total assets in equity and equity related instruments. On the other hand, a conservative hybrid fund will invest more in equity and only 25 percent of its total assets are allotted to equity.

Since hybrid funds invest both in equity and debt related instruments, they are also referred to as balanced funds.

Can hybrid funds balance the risk profile of an investor?

Before investing in any type of investment scheme, it is better that retail investors understand their risk appetite, investment horizon and most importantly, their investment objective. If you are looking to invest in mutual funds to save taxes, then an equity scheme like ELSS will help you bring down your tax liability. Someone with short term goals like vacation planning or buying a new vehicle may find investments in debt funds more suitable.

A hybrid fund may suit someone with a moderate to high risk appetite who is seeking capital long term appreciation and has an investment horizon of at least 10 years. That’s because different asset classes may outperform/underperform depending on market conditions. Hence, it is better that investors do not place all their bets in one asset class. Investors are also expected to rebalance their investment portfolio from time to time.

In case you have invested in any one particular type of mutual fund, investing in a hybrid fund may help you not only rebalance your portfolio but it might also help you balance the risk of your overall investment portfolio. That’s because if one asset class underperforms, it is less likely that other markets/industries/sectors may underperform too in tandem. Hybrid funds are professionally managed funds and provide active risk management. Thus, even if you are someone who doesn’t possess in-depth knowledge about mutual funds, you can still go ahead and invest in these funds. Hybrid funds are generally under the professional care of experienced fund managers, who buy/sell securities in accordance with the scheme’s investment objective.

Investing in hybrid funds might help you rebalance your portfolio, but remember that investments made in mutual funds are exposed to market volatility and hence returns are never guaranteed.