Hybrid Funds

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:

1. Balanced Funds - Balanced schemes invest in a mix of equity and debt.  The debt investments ensure a basic interest income, which the fund manager hopes to top up with  capital gains on the investment portfolio.  However, losses can eat into the basic interest income and capital. The greatest benefit of a balanced investment program is that it makes risk more palatable.  An allocation to bonds moderates the short term volatility of stocks, giving the risk averse long term investor the courage and confidence to sustain a heavy allocation to equities.  Choose a balance of stocks and bonds according to Investor’s unique circumstances – Investor’s investment objectives, Investor’s time horizon, Investor’s level of comfort with risk, and Investor’s financial resources. One of the common allocations used in these types of funds is known as the robot mix: 55 per cent in stock, 35 per cent in bonds, and 10 per cent in cash equivalents. A capital protected scheme is a kind of balanced scheme, where a part of the initial issue proceeds is invested in gilts that would mature to a value equivalent to the unit capital of the scheme. Thus, the investors’ capital is protected.  The remaining issue proceeds (excess over what is required to be invested in gilts for capital protection) is invested in risky investments. In such schemes, an Investor’s worst case scenario is that Investor’s investment does not grow.  But the principal amount invested is covered by maturity proceeds from the investment in gilt securities.
2. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.
3. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.