Breaking Down Hybrid Mutual Funds
SEBI has categorized mutual funds into equity, debt, hybrid, solution-oriented schemes and other schemes. We’ve addressed equity mutual funds and debt mutual funds in our earlier articles. We’ll now look at hybrid funds.
Hybrid funds, as the name suggests, are a mix of equity and debt in different proportions.
Funds that have a higher allocation to equity than debt are equity-oriented hybrid funds and those that have a higher allocation to debt are debt-oriented hybrid funds.
Let’s look at how SEBI has categorized hybrid funds.
Conservative Hybrid Fund
Conservative hybrid funds have a very low allocation to equity and equity related instruments – about 10% – 25% of total assets, and the rest is invested in debt. As a result of their minimal allocation to equity, these funds come with stable returns and are suitable for investors with a short-term investment horizon of 2-3 years
Balanced Hybrid Fund
Balanced hybrid funds seek to strike an equilibrium between the equity and debt components – the allocation to each comprising between 40% and 60% of the AUM. As these funds have an allocation to equity that is fairly high (minimum 65% in pure equity funds), they are suitable for investors who have a moderately high-risk appetite and investment horizon of 3-5 years.
Aggressive Hybrid Fund
Aggressive hybrid funds allocate a greater portion of the portfolio to equity & equity related instruments – between 65% and 80% of the AUM, and the remaining 20% – 35% of the AUM is invested in debt securities. This fund is suitable for investors with a high-risk appetite and an investment horizon of 3-5 years.
Dynamic Asset Allocation or Balanced Advantage
Dynamic Asset Allocation funds or Balanced Advantage funds, as the name says allocate AUM to equity and debt dynamically. SEBI has not mandated that a certain percentage is to be invested in equity and another in debt. This allocation is at the fund manager’s discretion. The beauty of this fund type is that when markets are growing, fund managers can capitalise on the growth with a higher allocation to equity, and when they are falling – they can cushion the investment with a higher allocation to debt. These funds are for investors who have an investment horizon of 3- 5 years.
Multi Asset Allocation Funds
Multi asset allocation funds invest in at least three asset classes with a minimum allocation of 10% in each of the three asset classes. In India, asset classes include equity, debt, gold ETFs. In foreign markets, funds also invest in real estate, commodities, hedge funds and private equity. Investors can choose between aggressive, prudent or conservative allocation to these asset classes depending on their risk appetite. One thing to note here is that foreign securities are not treated as an asset class on their own. These funds are suitable for investors who have an investment timeframe of at 3-5 years.
Arbitrage funds are those that follow an arbitrage strategy. Arbitrage, by definition, is the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms to take advantage of different prices for the same asset. The difference in the cost price and selling price is the return generated by the fund. These funds invest a minimum 65% of the AUM in equity & equity related instruments. What sets arbitrage funds apart from balanced hybrid funds is that in the latter, while allocation may overlap, no arbitrage is allowed in the fund. Arbitrage funds are suitable for investors with a medium-term horizon of 3-5 years.
Equity Savings Funds
Equity savings funds invest in equity, debt and seek to generate returns capitalising on arbitrage opportunities. The minimum allocation to equity & equity related instruments is 65% of the AUM, and minimum debt allocation is 10% of the AUM. A part of the equity portion is hedged – invested to reduce the risk of adverse price movements in an asset. This minimum hedged portion depends on each scheme and can be found in the Scheme Information Document (SID). These funds are suitable for investors with an investment timeframe of 2-3 years.
Hybrid funds are not a substitute for equity funds. However, beginner investors could explore these before moving to equity funds for wealth creation. Which fund you invest in should be in line with your investment goals, risk appetite and timeframe. Consult an advisor today!