The Hybrid Funds Hustle: Where Security Meets Growth

These days, hybridization is the way to go. Be it hybrid cars for the environment, hybrid dogs for pets, or hybrid funds for investment. We always find a way to combine the best of two worlds to create a whole that is greater than the sum of its parts, a sum that has the best features of both. 
This is exactly how hybrid funds operate. 

When it comes to investing in mutual funds, hybrid funds are an instrument that blend different asset classes within a single investment. Typically, they combine stocks (equities) and bonds (debt securities) in varying proportions to create a diversified and well-rounded investment portfolio. However, what makes hybrid funds especially stand out is their ability to adapt to changing market conditions and offer investors a unique approach to managing their wealth.

Why Have Hybrid Funds Become the Darlings of the Investment World?

With the versatility that hybrid funds offer, is it truly a surprise to find that everyone has hybrid fever? Here are some other reasons why hybrid is the way to go when it comes to your portfolio:

  1. Balancing Act: In an investment landscape where choosing between high-risk, high-reward equities and safer, but lower-return bonds can be perplexing, hybrid funds strike a harmonious balance. They aim to provide investors with a middle ground where they can participate in the potential upside of the stock market while enjoying the cushion of fixed-income securities during market downturns.
  1. Professional Management: Hybrid funds are typically managed by experienced fund managers who actively monitor and adjust the fund’s asset allocation to optimize returns while mitigating risks. This professional oversight reassures investors that their money is in capable hands.
  1. Risk Mitigation: One of the most significant attractions of hybrid funds is their potential to minimise risk. By diversifying across asset classes, they spread risk, reducing the impact of market volatility on the overall portfolio. This risk management approach is particularly appealing to investors who seek stability in their investments.
  1. Steady Returns: Hybrid funds are often favoured for their potential to deliver consistent returns over the long term. They cater to investors with varying risk appetites, offering a range of fund types from conservative to aggressive, each tailored to specific investment objectives.
  1. Tax Efficiency: Hybrid funds also come with tax benefits, as they may offer tax advantages when compared to investing directly in individual stocks or bonds. This can help investors optimise their tax liabilities and improve after-tax returns.

Hybrid funds come in all shapes, sizes, and varieties

Hybrid funds come in different flavours, each tailored to specific investment objectives and risk tolerances. Let’s explore the four main types:

Type of Hybrid FundObjectiveAsset AllocationRisk Profile
Conservative Hybrid FundsCapital Preservation10-20%80-90%Low to Moderate Risk
Balanced Hybrid FundsBalanced Growth and Stability40-60%40-60%Moderate Risk
Aggressive Hybrid FundsCapital Appreciation65-80 20-35%Moderate to High Risk
Dynamic Asset Allocation FundsTactical Asset AllocationCustomizableCustomizableFlexible Risk Profile

Note that the asset allocation column represents a rough estimate of how most funds distribute their capital between different instruments. Moreover, choosing the right type of hybrid fund subjectively depends on your investment goals, how long you want to stay invested, and appetite for risk.

Don’t be lazy, even hybrid funds can be risky 

Speaking of risk, investing in hybrid funds should not be reckless but mindful and well-researched. Being a market-linked instrument, it is bound to come with a certain element of risk that can be navigated. Here are some of the other considerations you should make before deciding to invest in hybrid funds:

  • Market Risks:

Hybrid funds are exposed to market fluctuations. Even conservative funds can experience losses during bear markets. It’s essential to have a long-term perspective and not panic during short-term market downturns.

  • Interest Rate Risks:

Debt securities in hybrid funds are affected by changes in interest rates. Rising rates can lead to capital losses on bond holdings, while falling rates may reduce income from debt investments.

  • Liquidity Risks

Some hybrid funds may face liquidity challenges, especially during market stress. This can impact the fund’s ability to meet redemption requests promptly.

  • Exit Load and Expenses:

Be aware of the fund’s exit load (fees for early withdrawals) and expense ratio (annual fees deducted from the fund’s assets). High expenses can erode your returns over time.

  • Tax Considerations:

Understand the tax implications of investing in hybrid funds. Gains from equity investments held for over one year are typically tax-free, while gains from debt investments are subject to capital gains tax.

Considering the aforementioned points, it is important that you periodically review your hybrid fund investments and adjust your asset allocation if your financial goals or risk tolerance changes. Remember, when it comes to investing, the well-informed always makes better than well-funded.

Fund NameCategory1Y Return5Y Return
UTI Hybrid Equity FundAggressive Hybrid Fund15.8%12.16%
Motilal Oswal Equity Hybrid FundAggressive Hybrid Fund10.89%
ICICI Prudential Equity & Debt FundAggressive Hybrid Fund18.98%16.61%
Nippon India Equity Hybrid FundAggressive Hybrid Fund15.51%7.52%
Canara Robeco Equity Hybrid FundAggressive Hybrid Fund10.19%12.76%
Mirae Asset Hybrid – EquityAggressive Hybrid Fund11.83%12.28%
Aditya Birla Capital Hybrid 95 FundAggressive Hybrid Fund9.34%9.36%

Tying it all together

Hybrid funds offer a balanced approach to investing, combining equities and debt to suit various financial goals and risk appetites. Hybrid funds aren’t just investments; they’re your financial sidekicks, offering the perfect blend of security and growth.

While hybrid funds offer a world of possibilities, they do come with a risk tag. Keep your eyes on the horizon, focus on long-term growth, and embrace the journey toward financial success. Your future begins now – harness the power of hybrid funds, and make your money thrive. Happy investing!


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Amit Arora

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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