A hybrid fund is a mutual fund that invests in a variety of asset classes within the same fund. Depending on the type of fund, it may be a mix of two or more asset types such as stock, debt, gold, and international equities in various amounts. Because there is minimal to no correlation between various asset types, an investor may skillfully manage risk and reward.
Each is categorized based on asset class allocation and risk component, and each has a distinct investment style and objective.
Here are the six major types of hybrid funds:
A conservative hybrid fund – invests only around 10 to 25 percent of its entire assets in stock markets, i.e., stocks. The remainder is invested in debt securities such as corporate and government bonds, as well as non-convertible debentures. While the debt investment seeks to offer consistent and predictable income through coupon payments, the equity portfolio has the potential to generate revenue.
Aggressive hybrid fund – This type of hybrid fund is the polar opposite of a conservative hybrid fund and is suitable for investors with a greater (equity-like) risk appetite. The mandate is for a 65-80 percent allocation to equities across market capitalizations (large-cap, mid-cap, and small-cap), with the remainder allocated to debt and other asset classes.
The category is excellent for investors seeking equity-like returns (since 65-80% of the portfolio is invested in equities) but with lower volatility (balance 20 percent -35 percent is invested in fixed income). However, because the underlying is highly weighted toward stocks, investors should examine this product for at least five years.
Fund for Dynamic Asset Allocation – A balanced advantage fund or a dynamic asset allocation fund are hybrid mutual funds that raise or reduce allocation between equities and fixed income based on specific pre-defined valuation factors. If an investor does not want to time the market, they might invest in balanced advantage funds.
Arbitrage fund: Arbitrage funds profit on a stock’s price disparity on two separate exchanges or between two different marketplaces (the cash and derivative market). The fund management captures the spread between the two markets by establishing an arbitrage position, which results in rewards for the investor.
Multi-asset allocation fund: Going above and beyond typical hybrid funds, the multi-asset fund invests in at least three distinct classes, with at least 10% allocated to each. A combination of three asset classes can assist an investor in achieving asset allocation goals with a single product.
Equity savings fund: The equities savings fund is another option for portfolio diversification since it is a smart combination of equity, debt, and arbitrage. An equities savings fund does this by investing at least 65 percent of its assets in equity and arbitrage positions, with the remainder in fixed income instruments.
The fund’s stock position is partially hedged, which reduces volatility as compared to the aggressive hybrid fund’s unhedged equities exposure. In addition, the fund provides equity taxes.