Investment Avenue: Which hybrid fund is the best fit for you?

Investors are confounded by the fact that hybrid funds are classified into seven separate sub-categories. Continue reading to learn how to choose the best hybrid fund for you.

Hybrid funds combine two or more asset types. They are primarily based on two asset classes: equities and debt. In hybrid funds, there are nearly seven sub-categories, and the majority of them appear to be identical. However, they are not the same in reality since the investing method they use is highly different. As a result, this article will assist you in understanding the many sub-categories of hybrid funds and will also aid you in picking them.

Balanced hybrid funds

According to the Securities and Exchange Board of India (SEBI), balanced funds should invest at least 40 per cent of their assets in either debt or equity. The fund's minimum allocation of 40 per cent to equity and debt investments ensure that the risk-reward ratio remains stable.

Suitability:

This is better suited to investors with a somewhat conservative risk profile, as it will fit their risk and return profile.

Multi-asset allocation funds

These funds are allowed to invest in a variety of asset classes, while SEBI regulations require that they do so in a minimum of three. Furthermore, the fund should allocate at least 10 per cent of its assets to each of these three asset groups. This fund provides diversity since it invests across many asset classes.

Suitability

This product is appropriate for individuals seeking diversification who have a moderately conservative to moderate risk profile.

Aggressive hybrid funds

The name of the fund itself tells you all you need to know about it. According to the SEBI definition, an aggressive hybrid fund should invest at least 65 per cent of its assets in stocks. Investing in equities, on the other hand, has a cap of 80 per cent. This indicates that no more than 80 per cent of the fund's assets can be invested in shares. Fixed-income securities, which invest in a variety of debt and money market instruments, provide the remaining component of the asset allocation.

Suitability

This fund is better suited to individuals with moderate risk tolerance, particularly first-time investors who want to gain experience investing in stock markets.

Dynamic asset allocation funds

Dynamic asset allocation funds, also known as balanced advantage funds, are a form of fund that has no constraints on how it allocates assets between equity and debt. Depending on market mood, the fund can adjust its asset allocation from 100 per cent stocks to 100 per cent debt.

Suitability

This fund is better suited to investors with a moderate to moderately aggressive risk tolerance.

Conservative hybrid funds

Conservative hybrid funds are ones whose goal is to safeguard capital while still generating some growth through a small equity investment. According to SEBI guidelines, the equity exposure of these funds should be between 10 per cent and 25 per cent, with the remainder of the assets allocated to debt and money market instruments.

Suitability

These products are appropriate for people who want to generate larger long-term returns than bank fixed deposits. These funds are better suited for more conservative investors.

Equity savings fund

Equity savings funds strive to achieve the ideal mix of debt securities, derivatives, and stocks. The goal of these funds is to ensure that market volatility has no substantial influence on the fund's performance. According to SEBI regulations, these funds must devote at least 65 per cent of their assets to equities and equivalent instruments, with the remainder allocated to debt securities. Having stated that, the funds must specify the minimum hedged and unhedged portion in the scheme information document (SID).

Suitability

These funds are appropriate for investors who are unable to resist market volatility.

Arbitrage funds

Arbitrage funds are those that use the arbitrage technique, in which the fund buys assets in one market and sells in another, with the price difference between the two markets referred to as the arbitrage profit. During times of increasing volatility, these funds gain money. According to the SEBI, these funds must invest at least 65 per cent of their assets in equities and similar products. As a result, when there are arbitrage possibilities and lower interest rates, it is prudent to invest in debt and money market instruments. Furthermore, for tax purposes, these funds are classified as equity funds.

Suitability

These funds are appropriate for persons in the highest income tax bracket with a three-month to one-year investment horizon.