Investors like to try out a range of investment options to diversify portfolios. Then, there are those investors who prefer a mix of asset classes in a single plan to diversify a portfolio or lessen risks. As many types of investors as you can find, depending on financial goals and needs, there are as many kinds of investments to match. Investors who want a combination of asset classes in a single fund can opt for hybrid funds. Hybrid funds may collaborate asset classes like gold, equity, and fixed income instruments to maximise returns for investors.
The Latest Reports
Since the start of the financial year (FY22), hybrid funds have witnessed an inflow to the tune of about Rs. 65,000 crores. What this implies is that several equity investors think that stock markets may be quite overvalued and are in the offing of a market correction. Furthermore, there are a host of investors allocating wealth to balanced advantage funds. These are a kind of hybrid fund. As hybrid funds exemplify a safer way to invest, rather than taking the risks of volatility in pure equity investment, investors may be trying to find a safer way to navigate their investments through strangely high and unpredictable markets.
Hybrid Funds Explained
Hybrid funds are a class of mutual funds that invest in more than a single asset class. The word “hybrid” refers to a mixed class of assets invested with the fund, as opposed to regular mutual funds which only invest in equity. The premise of investing in hybrid funds is that they can beat market risks, and periods of downturn, as funds and their returns are not just reliant on a single asset class. For instance, if a hybrid fund where to invest your capital, partly in equity, debt, and gold, the part of your fund comprising debt and gold would act as a hedge against the potential risks of equity.
Why Investors Opt for Hybrid Funds
Investors choose to invest in hybrid funds for a range of reasons. For novice investors who are unsure about how markets and investments work, hybrid funds are a good starting point for investment. Hybrid funds also work for investors who wish to dabble in equity but are apprehensive about the volatility that is so characteristic of stock markets. For those with low appetites for risk, and those who would like balanced and diversified portfolios, hybrid funds are a good investment choice.
Types of Funds
Now that you know about the highlights of hybrid funds, you probably have some idea about the reasons that people invest in them. When there is some doubt regarding the markets and severe price fluctuations that may potentially occur, staying with hybrid funds is a safer bet than continuing your investment with pure equity. When the regular markets soar, your hybrid funds act as a hedge, remaining somewhat stable. Within hybrid funds, you will discover balanced advantage funds, those that invest in stocks and securities of a fixed-income nature. These funds are dynamically managed funds in which fund managers adjust asset allocation with regard to debt or equity based on the prevailing conditions in the market.
The Adjustment of Funds
How does a fund manager adjust the allocation of the assets in a fund to match market conditions? An instance of this would be when a fund manager actively reduces your fund’s exposure to equities and raises it with respect to debt when the stock markets surge. This is done to avoid any potential sudden crash of the markets when stocks reach unprecedented high levels in price. A contrasting case would be that in which fund managers bring down allocation to debt and raise it with equity in any hybrid funds when markets are slow. This is the way that fund managers strike a balance of stability while still allowing funds to develop and grow in a steady manner.
Staying with Hybrid Funds that Have “Staying Power”
After you know why hybrid funds have “staying power” and the ability to withstand volatility in the markets and the general economy, you will understand why and how to stick with such funds. The problem with most investors is to act too impulsive when there’s a potential upswing or downturn in the markets. However, hybrid funds offer you a balance between the growth of capital and income in your financial portfolio. Hybrid funds have the ability to introduce new investors to the world of stocks in a safe way, reducing risks in investment.
Since August 2021, there have been huge inflows (amounting to some Rs. 16,500 crores in August) into funds that offer a balanced advantage. The consensus of why this happens is because investors might fear exponential rises in the markets, to be followed by equally severe falls. In case you are fresh to the world of stocks, you should stay with your hybrid funds, or even invest in some if you have not. In the long run, such funds overcome the humps of volatility in unstable times and give you good returns.
The Balanced Advantage
Hybrid funds give investors a clear way to diversify a portfolio and great gains for the long term. If you’re new to stocks or are an investor who lacks the time and the requisite skills to focus on investments, hybrid funds are good to stick to.
