With good returns and low volatility – why is hybrid fund a good investment option?

Many investors face the dilemma of choosing between equity and debt investments. Hybrid mutual funds offer a solution by combining the benefits of both. Before diving into hybrid funds, it’s essential to grasp their fundamentals.

Hybrid mutual funds are a distinctive type that provides access to both equity and debt investments. To gain a better understanding of these schemes, read on to explore their definition, functioning, types, tax advantages, and more.

What are Hybrid funds?

Hybrid funds are mutual fund schemes that invest in multiple asset classes, such as debt, equity, derivatives, and gold, to build a diversified portfolio. The most common type combines debt and equity assets, although some variants may also include investments in a third asset class like gold or derivatives.

Investors seeking higher returns than pure debt funds, and who can tolerate slightly higher risk, may find hybrid mutual funds appealing. The allocation between debt and equity varies among different types of hybrid funds, affecting the level of risk and potential returns. Investors choose based on their risk tolerance and financial goals. Hybrid funds can be equity-oriented, with a higher allocation to equity instruments, or debt-oriented, with a greater focus on debt instruments like bonds or certificates of deposit.

Why is a hybrid fund a good investment option?

Access to Multiple Asset Classes: By investing in hybrid funds, investors gain exposure to a diverse range of asset classes such as equities, debt securities, derivatives, and sometimes even commodities like gold. This diversification helps spread risk across different investment avenues, reducing overall portfolio volatility.

Active Risk Management: Hybrid fund managers employ active risk management techniques to optimise returns while minimising potential losses. They strategically allocate assets between equity and debt based on market conditions, economic outlook, and risk tolerance. During market downturns, the debt component provides stability, while the equity portion aims to capitalise on growth opportunities during bullish phases.

Also Read – Balanced Advantage Funds

Caters to Various Risk Profiles: Hybrid funds offer flexibility to cater to investors with varying risk appetites. Equity-oriented hybrid funds are suitable for those seeking higher returns and are willing to tolerate greater market volatility. On the other hand, debt-oriented hybrid funds are more appropriate for conservative investors who prioritise capital preservation and steady income.

Buying Low and Selling High: Fund managers follow a disciplined approach of buying assets when their prices are perceived to be undervalued and selling them when they appreciate. This practice, known as “buying low and selling high,” aims to enhance long-term returns by capitalising on market inefficiencies and identifying value opportunities across different asset classes.

Automatic Rebalancing: Hybrid fund managers regularly rebalance the portfolio to maintain the desired asset allocation. This process involves adjusting the proportion of equity and debt holdings based on market movements and fund objectives. Automatic rebalancing ensures that the portfolio stays aligned with the investment strategy without the need for constant monitoring by investors. Additionally, professional management of rebalancing helps minimise transaction costs and tax implications associated with portfolio adjustments.

Overall, investing in hybrid funds provides investors with a well-rounded investment solution that combines the benefits of diversification, active risk management, and professional portfolio oversight, making it an attractive option for many investors seeking to achieve their financial goals while managing risk effectively.

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