Mutual funds are made of various kinds of units that belong to either debt or equity. Both have their pros and cons. While equity funds boast of high returns, the level of risk is considerably high. With debt, you are assured of a return but it is quite low. The best course of action, if you want to get high returns without running high risks, is to invest in hybrid funds.
What are Hybrid Funds?
Hybrid funds split the investment into both debt and equity to strike the perfect balance of risk and returns. It also allows adequate diversification without jeopardising your objective behind the investment. They meet your long-term goal of wealth creation and your short-term goal of a regular income at the same time. The proportion of money in debt and equity is determined depending on your financial goals. Therefore, they may lean towards equity or debt. By investing more than 65% in equity, your portfolio becomes equity oriented and by investing more than 60% in debt, it becomes debt-oriented. You can also choose to maintain liquidity by investing in cash assets.
They are considered quite safe as the risks are lower than equity-based funds and returns are higher than debt centric funds. This makes hybrid funds a favourite among new investors. Some types of hybrid funds allow re-allocation of assets in debt and equities to make the best of the market.
Types of Hybrid Funds
- Balanced Funds
- Monthly Income Plans
- Arbitrage Funds
What are Balanced Funds?
If your investment portfolio contains at least 65% of the assets in equities, it is a balanced fund. Holding such instruments make you eligible for tax benefits. It is suitable for conservative investors who want moderate returns without the risks.
What are Monthly Income Plans?
Such investments, invest around 15%-20% in equities to get higher returns than debt funds. You get a regular income as dividends, whose frequency you get to decide. You can also choose to use the dividend to grow the corpus of your fund. Thus, it is an income fund as well as a growth fund.
What is Arbitrage Funds?
They are a type of mutual fund that exploits the price difference of equities on different stock exchanges. Simultaneous buying and selling of securities is a feature of such funds. When there are no price mismatches, the money remains invested in debts or money market instruments.
Advantages of Hybrid Funds
- High returns with lower risks.
- Diversified portfolio
- Taxation benefits for equity-oriented portfolios.
- Meet short-term goals and long-term goals through the same investment.
- Best for new investors
While hybrid funds are not completely free of risks, it is less risky compared to other funds like equities. As long as you keep re-balancing your portfolio to suit the market trends, you will reap returns. To make the best of hybrid funds, goo for medium-term investments, like 5 years. This way you will keep meeting your long-term goals as well as your short-term goals.
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