5 reasons why Hybrid Mutual Funds are best for diversification

Rahul Verma
June 13, 2023
Hybrid Mutual Funds
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Diversification is a crucial part of financial planning and, investing in mutual funds provides individuals with an opportunity to grow their wealth while diversifying their investment portfolios. But, building mutual funds portfolio can be a tedious job, finding the right mutual funds for equity and debt investment, tracking them, and bearing other chargers such as expense ratio and exit load simultaneously.

That’s where “Hybrid Mutual Funds” bridge the gap for investors prevailing against the barriers of sorting two funds and bearing their individual charges. Hybrid mutual funds, also known as balanced funds, offer a unique combination of asset classes, combining the benefits of equity and debt instruments. In this blog post, we will delve into the world of hybrid mutual funds, uncovering their advantages, considerations, and why they are worth considering for your investment strategy.

What are Hybrid Mutual Funds?

Mutual fund houses came up with a balanced mutual fund, with the aim of providing investors with diversification options under one fund. These funds aim to provide a balance between capital appreciation and income generation while managing risk through diversification. Here are the key features of hybrid mutual funds:

Hybrid funds, allot their corpus across different asset classes, provident the much-needed balance against the volatile market. One asset class balances out the turmoil of its counterpart. These funds typically, allot around 80% of their corpus in equity, 15% in debt, and the remaining 5% in cash equivalent and other alternative investment options.

  • Capital Appreciation and Stability: 

The equity component of the funds assures capital appreciation, as their underlined stocks appreciate in the market. The debt component of the funds includes corporate bonds, government securities and other debt instruments. The debt component provides stability, and regular income generation, and acts as a cushion during market downturns. The allocation to debt instruments helps manage risk and reduces the overall volatility of the fund.

Hybrid funds offer diversification by investing in a mix of equity and debt instruments. This diversification helps spread risk across multiple asset classes, sectors, and securities. By diversifying the portfolio, hybrid funds aim to reduce the impact of a specific security’s performance or market volatility on the overall fund’s returns.

  • Regular Income: 

Dividends from the equity component and Interest yields from the debt component assure a regular stream of income for the investors. But, generally, these dividends and interest yields are re-invested in the funds, resulting in an overall value increase for the funds.

Points of consideration before investing

There are several points of consideration before investing in any asset class, analyzing and examining across various checkpoints. All these points are to be compared for each point against the industry average. Following are some points of consideration for hybrid mutual funds:

  • Expense Ratio: The expense ratio represents the annual fees and expenses charged by the mutual fund for managing the fund’s assets. A lower expense ratio indicates the fund is comaparitevly cheaper and will have a positive impact on the overall performance of the investment.
  • Sharpe Ratio: The Sharpe ratio measures the risk-adjusted returns of a mutual fund. It’s beneficial to consider the Sharpe ratio when comparing different hybrid funds as it provides insights into how well the fund has performed relative to the level of risk taken. A higher Sharpe ratio indicates better risk-adjusted performance.
  • Exit Load: Exit load refers to the charges, an investor has to bear while redeeming his investment returns if sold before a specific time period generally during the lock-in period. Exit load affects the liquidity and flexibility of the investment. 
  • Minimum Investment: The minimum investment requirement specifies the minimum amount of money that an investor must contribute to purchase shares of a mutual fund. It’s essential to consider the minimum investment required to ensure that it aligns with your investment capacity and financial goals. Some funds may have higher minimum investment amounts, which may only be suitable for some investors.
  • Funds’ Objective and  Asset Allocation: Hybrid funds are divided into three categories based on objective and asset allocation:
    • Conservative: The debt Component is more than that of the equity component.
    • Moderate: Allocation is balanced between equity and debt component.
    • Aggressive: Mojoirty of the corpus is invested in the equity component.

Each category yields different returns and carries its own risk. Aggressive carries the most whereas conservative carries the least. Investors can choose funds based on their goals and risk tolerance. Which can be decided based on the rules of investing.

India’s top performing Hybrid Funds**

Fund NameAMCReturns (3 years)Returns (5 years)
ICICI Prudential Equity Savings FundICICI Prudential11.45%8.17%
HDFC Hybrid Equity FundHDFC25.00%12.73%
Kotak Mahindra Focused Equity FundKotak Mahindra25.76%16.88%
SBI Multi Asset Allocation FundSBI13.90%10.75%
Nippon India Growth FundNippon India35.57%16.97%

**It is advisable to conduct thorough research and contact your mutual fund advisor, before investing.

To Sum it UP

Hybrid mutual funds offer a range of benefits, including diversification, balanced risk, and return, risk management, potential income generation, flexibility, and a simplified investment approach. However, investors should carefully consider the risk profile, market volatility, fund management, expense ratio, investment horizon, and tax implications before investing in hybrid funds. By conducting thorough research, consulting with financial advisors, and aligning the funds with their investment strategy and risk tolerance, investors can make informed decisions about incorporating hybrid funds into their investment portfolios.


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