Hybrid Funds: Growth of Equities and Stability of Debt

Published On: 18-Mar-2020

Having a diversified portfolio with investments across different securities and asset classes is always desirable, as it helps you to manage risks to a great extent. However, while diversifying your portfolio, one often ends up investing in multiple mutual fund schemes. Wouldn’t that be great if you can invest in multiple asset classes through one fund itself? Hybrid funds help you precisely do the same.

Performance of Equity, Debt and Hybrid Funds

What are hybrid funds?

Hybrid Funds are mutual fund schemes, which enjoy the flexibility to invest in both equities as well as debt securities simultaneously. As such, the portfolio may enjoy the potential of higher returns over the long term through the equity component and may also resist the high volatility through the debt component. Further, mutual funds offer different schemes under the broad category of hybrid funds itself, to suit the investors with varied risk profiles. While conservative investors may opt for hybrid funds with higher debt component, the investors with an aggressive risk profile with higher risk appetite may opt for hybrid funds with higher equity portfolio.

Types of Hybrid Funds

Hybrid funds investing across debt & equity can broadly be classified into the following categories, suiting the varied risk profiles:

  1. Conservative Hybrid Fund – Such hybrid fund will invest predominantly in debt securities (75% to 90% of the portfolio) and the balance in equity securities.

  2. Balanced Hybrid Fund – A balanced hybrid fund needs to stay balanced in terms of the portfolio allocation across equity and debt, wherein both of these can be 40% to 60% of the portfolio.

  3. Aggressive Hybrid Fund – An aggressive hybrid fund will invest predominantly in equity securities (65% to 80%) and the balance in debt securities. As such, the high volatility in equity markets may be moderated through the debt portfolio.

Historical data tends to suggest that no asset class has always been a winner for the investors, and all the asset classes tend to go through their own economic cycles. However, having a mix of both equity as well as debt moderates the volatility in your portfolio to a large extent, and in fact may help you even generate better returns for you, especially when the markets are volatile and under corrective phase. The chart below reflects how investing in a hybrid fund (represented by CRISIL Hybrid 75:25 Index) might have helped your portfolio over the period from January 2008 to December 2018, vis-à-vis the performance of a pure equity fund (represented by S&P BSE Sensex) or a debt fund (represented by CRISIL 10-year G-Sec Index).

Performance of Equity, Debt and Hybrid Funds

Source: S&P BSE Sensex, CRISIL Hybrid 75:25 Index, CRISIL 10-year G-Sec Index

With a wide range of hybrid funds, all types of investors may get their own perfect fund, suiting their respective risk profiles and risk appetite. Investors can also choose to invest in different categories of hybrid funds based on their financial goals and time duration left for such goals. For example, for a medium-term goal, a conservative hybrid fund may be more suitable whereas the investors may still be comfortable with an aggressive hybrid fund if they are investing in it for their long-term financial goals.

While the market volatility is not in our hands, diverting such volatility into our advantage is indeed possible. With the asset allocation being the key to lower volatility, hybrid funds may automatically help you manage and decide the relative allocation of the portfolio to different asset classes based on your risk appetite, specific investing goals and the timeframe for such goals.

Essentially, hybrid funds strike a balance between two extremes of equity and debt providing an added advantage to accomplish your financial goals.