A hybrid fund is a category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed. Morningstar separates hybrid funds into domestic hybrid and international hybrid categories.
Also known as Balanced Funds or asset allocation funds, Hybrid Funds are mutual funds that provide a combination of more than one underlying investment asset class, such as stocks, bonds or cash.The "hybrid" descriptor comes from the idea that one mutual fund consists of a mix of different elements typically existing in two or more funds. Most often, hybrid funds are a combination of stocks and bonds and the fund will have a stated objective, such as aggressive, moderate or conservative.
These funds are more tilted towards equities i.e. they have more exposure to equities then debt. Balanced funds fall in this category. Since equity exposure is high volatility of these funds is also higher. For risk averse investor these funds may fall in very high risk category but in general they are an ideal investment options for long term. The performance of these funds has been at par with diversified equity funds which make them an attractive investment avenue.
This category has many varieties named as conservative, moderate or aggressive funds. The exposure to equity and debt varies within these schemes. While a conservative hybrid funds will limit equity exposure to 10%, a moderate can go upto 20% while aggressive hybrid mutual funds scheme will have option to take equity exposure up to 30%. Due to this variation in exposure the risk return characteristics among these funds varies.
There are few other mutual funds schemes which can be termed as hybrid funds. First one is the arbitrage funds. These funds aim to capture arbitrage opportunities in the cash and derivative market and invest a sizeable portion in the debt segment. Ever since debt funds taxation was increased these funds attraction have also increased due to considered lower volatility and equity taxation. But investor needs to understand that these are equity funds and so there is risk associated. The other funds which can be termed as hybrid funds are asset allocation funds which keep varying exposure to discussed asset classes.
• Obviously the most striking advantage is being able to switch over from one combination to the other available to a more aggressive growth oriented stocks when the market is bullish and vice versa.
• It provides diversity in true sense with portfolio containing top stocks and bonds for a blend of growth and safety.
• There is no trouble in managing an assortment of investments yourself. The one fund gives it all and reduces your overall problem of managing the investment.
Hybrid funds have an exposure to debt. This protects your investment when stock markets are volatile or crash.
When stock markets rise, or there is a bull run, the hybrid funds give better returns than debt funds.
With an exposure to both equity and debt the hybrid fund is naturally diversified. You don't have the headache of balancing the portfolio.
Equity hybrid funds are treated as equity, for tax purposes. Long term capital gains are tax exempt, just like equity.