A NEW CATEGORY OF MUTUAL FUNDS – HYBRID MUTUAL FUNDS

There are different classes of assets like stocks, bonds, real estate, gold, so on and so forth. A hybrid mutual fund is essentially a mutual fund but with investment in two or more than two asset classes. A hybrid mutual fund investment assures you of a diversified portfolio. They are also called asset allocation funds. And, as the name suggests, these mutual funds give an investor the opportunity to invest in varied asset classes through a common fund.

Risk averse people can select a hybrid mutual fund that offers low risk, there are schemes available for people who want to take moderate amount of risk and there are schemes for risk lovers as well. In other words, we can say that a hybrid mutual fund offers schemes in varied levels of risk toleration.

There are a total of 6 categories defined in the hybrid mutual fund schemes:

  1. The first one being conservative hybrid funds. Now, these funds need to have 10% – 25% of their total asset in equity and equity related instruments and they need to have 75% – 90% of their total assets into debt instruments and the type of scheme these funds need to specify is that these are open ended hybrid schemes investing predominantly in debt instruments.
  2. The next category is wherein the mutual fund house can either have balanced hybrid fund or an aggressive hybrid fund. If they choose balanced hybrid fund, they need to have 40% – 60% of their total assets in equity and equity related instruments and 40% – 60% of the assets into debt instrument and in this scheme, they cannot go for any arbitrage opportunities. These funds have to specify that these are open ended balanced schemes investing into equity and debt instruments. If the fund house goes for aggressive hybrid funds, these funds need to have 65% – 80% of the assets tied up in equity and equity related instruments and 20% – 35% of total assets in debt related instruments. These types of schemes specify that these are open ended hybrid schemes investing predominantly into equity and equity related instruments.
  3. The next category is dynamic asset allocation. These funds can invest in equity and debt that is dynamically managed. This type of scheme is called an open ended dynamic asset allocation funds.
  4. The next category is of multi asset allocation wherein the fund can invest in at least 3 asset classes with a minimum allocation of at least 10% in each of the three asset classes. These are open ended schemes investing into 3 different asset classes and they would have to specify the name of the three different asset classes chosen for investment.
  5. The next category is of arbitrage funds and these funds would have to follow arbitrage strategy wherein the minimum investment in equity and equity related instruments has to be 65% of the total assets. Basically, these are open ended schemes investing into arbitrage opportunities.
  6. The last category in hybrid schemes is the equity savings fund. These funds need to have a minimum of 65% of their total assets in equity and equity related instruments and they also need to have a minimum of 10% of total assets into debt instruments. These funds would have to specify minimum hedged and unhedged allocation in their scheme information document along with asset allocation to be followed under defensive considerations in the offer document. These types of schemes are open ended equity, arbitrage, and debt.

So with this, a mutual fund house would be allowed only one fund per category in case of hybrid funds and a respect of the similar existing schemes as well as those that are not in line with the categories that are defined by SEBI (securities exchange board of India).

It would be wrong to expect high returns from a hybrid mutual fund because the classes of the assets to which your money is tied may fluctuate which would ultimately affect the NAV (net asset value). An ideal hybrid mutual fund would be one that has a medium risk tolerance and a gestation period of 5 years, however, if you don’t want any involvement of risk in your returns, then arbitrage funds would be the best. Hybrid funds are the best to fulfill your goals pertaining to buying a new asset like a car or a house, funding your own or your child’s education or even for a vacation.

While investing in a hybrid fund, keep in mind the risk that you want to tolerate, the goal behind your investment and the duration for which you want to keep your money tied.