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Are hybrid funds less risky than equity mutual funds?

By now you might have heard from several investment advisors and pundits across social media platforms offering almost same investment advice. While their intention might be to guide their viewers / readers in the right direction it is up to the consumers to understand whether these investment advices suit their goals. Investing in mutual funds can be one way to achieve financial goals but investors must find the right direction. That is because there are literally thousands of investment products offered by Asset Management Companies and for someone who is new to mutual fund investing, things can get a little confusing.

Until a few years ago, investing in mutual funds was considered to be confusing and it was recommended to seek professional consultation before making an investment decision. But the recategorization done by market regulator SEBI has done investments in mutual funds simpler and more transparent.

What are hybrid funds?

To understand whether hybrid funds are riskier than other equity mutual funds investors must understand how and where these mutual funds invest and to achieve their investment objective. A hybrid fund is a one a kind mutual fund scheme that invests in both equity and debt to earn capital appreciation. How much of its investible corpus in which asset class a hybrid fund will invest will totally depend on the nature of the scheme and the fund manager handling the portfolio.

Where and how much to hybrid fund allocate assets?

1.      Conservative Hybrid Funds: The scheme invests 10% to 25% equity and rest in debt.

2.      Balanced Hybrid Funds: The hybrid fund invests 40% to 60% equity without arbitrage and rest in debt.

3.      Aggressive Hybrid Funds: Invests predominantly (minimum 65% to 80%) in equity and the remaining in debt.

4.      Dynamic Asset Allocation or Balanced Advantage Fund: Dynamically invests across asset classes.

5.      Multi-asset allocation: The scheme invests minimum 10% each in equity, and gold and rest will depend on the fund manager handling the portfolio.

6.      Arbitrage funds: The scheme only needs to invest 65% in equity and equity-related investments.

7.      Equity savings funds: The schemes must invest minimum 10% in debt and 65% in equity and equity-related instruments.

Hybrid v/s Equity mutual funds

Here’s a quick comparison between hybrid funds and other mutual fund schemes –

Criteria

Hybrid Funds

Equity mutual funds

Risk profile

Risk may vary depending on the asset allocation strategy of the scheme

Equity mutual funds carry a high or very high risk appetite

Returns

May offer capital appreciation higher than debt funds

Returns are subject to market volatility

Liquidity

Liquidity may vary depending from one hybrid scheme to another

Except for ELSS which comes with a predetermined lock-in period of three years, all equity mutual funds offer great liquidity

Investment horizon

Might suit the needs of investors with an investment horizon of three to five years

Ideal for investors who wish to target their long term financial goals

Suitable for

Investors who wish to invest in both equity and debt for earning capital appreciation

Investors with a very high risk appetite and long term investment horizon

Both equity funds and hybrid funds carry a fair amount of risk and we cannot determine which one is riskier than other. However, to mitigate investment risk investors should consider starting a monthly SIP. Systematic Investment Plan allows investors to invest small fixed amounts at regular intervals.  Investors can start a monthly SIP in either of these investment products and give themselves an opportunity to earn capital appreciation. Before investing, it is important to clearly bear in mind that neither hybrid funds nor equity funds guarantee capital appreciation.

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