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September 21, 2023

​Know why some investors prefer hybrid funds over equity

A mutual fund is a pool of investible corpus collected from various investors to meet distinct financial goals. They can be categorised into hybrid, debt, and equity funds. Market investors tend to invest in mutual funds majorly based on their risk appetite level. For instance, those with a high-risk tolerance level invest in equity mutual funds. Those who do not dare to take any risk and look for capital preservation features over returns, invest in debt mutual funds. Hybrid mutual funds are selected by those who fear generating losses on equities due to market volatility and are unhappy with stable returns on debt investments.

What is a hybrid mutual fund?

Hybrid mutual funds invest in both debt and equity instruments. Debt constituent in the investment restricts the involved investment risk while the equity constituents offer wealth creation features over the long term. These funds are prudent when the interest rate regime shows a downfall, and the equity market performs well.

What is an equity mutual fund?

Equity mutual funds invest the maximum corpus in equity and equity-linked instruments. However, they have a high-risk level. While it is recommended for you as an investor to invest in equity mutual funds to meet your long-term goal, the capital amount that you should invest in equity mutual funds differs depending on your financial goal, age, and risk appetite level.

Suppose your age is 25 years and you have a long-term financial goal with zero immediate commitment, then you must invest at least 60-70 per cent of your investible amount in equity mutual funds. In contrast, if you are a 35-year-old with a short-term commitment of up to 5 years, then you must invest up to 30 per cent of your investible amount in an equity fund and the rest in a debt fund. A higher concentration of investment in debt funds is recommended to avoid witnessing losses during market volatilities when nearing the investment horizon.

Why do some investors prefer investing in hybrid mutual fund over equity mutual funds?

Investors with low to mid-risk appetite levels tend to invest in hybrid funds as such funds invest in both debt and equity instruments to balance out the involvement of risk. The strategy followed by the hybrid fund is in alignment with the investment philosophy that many follow i.e., investment diversification. Here, during volatile markets when equity investments underperform, then debt investments compensate for the loss in returns and when debt funds underperform, then investments in equity help to make the most out of the market.

When is the right time to invest in hybrid mutual funds?

Hybrid mutual funds may be the correct​ investment option during a falling interest rate regime, when your investment horizon is mid-term in nature. For instance, suppose you are 24 years old and want to buy a 4-wheeler within four years. Now, to buy a 4-wheeler costing Rs 4 lakh, you must invest a monthly investible amount of Rs 6,820 through SIP for four years in the selected hybrid mutual fund assuming the annualised return rate is 10 per cent per annum. A hybrid mutual fund is recommended for this goal owing to its mid-term nature, which makes it a safer choice than equity funds due to its diversification feature. Also, it generates better returns than debt mutual funds.

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