Assets Under Management AUM

Mutual Funds: What Makes Hybrid Funds So Attractive?

By Raghav Iyengar

If we were to roll call the New World Order, the word “hybrid” will probably appear more than once. Hybrid car, hybrid education and now even a hybrid working style! The reason hybrid models are gaining popularity is quite simple: It allows us to select the best traits from each existing option and create a value proposition that is hands down the best. And this is precisely the thought process behind mutual fund houses offering a “hybrid fund”.

An equity fund invests in stocks of listed companies while a debt fund invests in treasury bills, corporate bonds and other fixed income securities. The risk / return is directly proportional in the two funds, which means that equity funds are higher in terms of risk and return and vice versa for debt funds.

Meanwhile, a hybrid fund makes the best of both and invests in multiple asset classes, allowing an investor to spread risk according to their preferences within a single fund. This includes investments not only in equity and debt, but also in gold and international equity in some cases. The fund transparently overlaps these asset classes based on their price movement and focuses on providing better risk-adjusted returns for investors.

Unsurprisingly, hybrid funds have earned the nickname “permanent allocations” and are growing in popularity globally. In India, too, the hybrid fund category is seeing increasing interest from investors. Since March 2020, assets under management (AUM) of hybrid funds have increased by 31% to reach Rs 3.42 lakh in March 2021. This represents 11% of the total AUM share of the mutual fund industry ( Rs 31.42 lakh crore).

Here are the top four reasons hybrid funds are attractive:

Unique solution
One of the main advantages of a hybrid fund is the underlying structure of the portfolio. Since hybrid funds invest in a combination of stocks, debt and more, depending on the investment objective, this allows an investor to gain exposure to multiple asset classes within the same fund.

The principle of asset allocation helps to create sustainable wealth over the long term. Indeed, there is little or no correlation between the performance of the different asset classes. Therefore, a combination of several assets tends to give returns that mirror the returns of stocks and sometimes even exceed them.

Flexible risk moderation
Based on the risk appetite, investors can decide the percentage allocation between different asset classes in a hybrid fund.

For the convenience of the investor, hybrid funds have been classified into four main types: conservative hybrids, aggressive hybrids, dynamic stocks and stock savers. Conservative funds have maximum exposure to fixed income instruments while aggressive funds have maximum exposure to equity instruments. An investor can choose the investment style that best suits his financial goals.

Rebalancing proposal
The diversified nature of the fund minimizes the possibility of a larger decline due to a single asset class. Investors can save the time and effort required to follow the markets and manage their asset allocation because the fund manager in hybrid funds automatically rebalances the different asset classes within the portfolio. So even if one asset class is affected, the other can help generate returns.

Given the dynamic nature of stock markets, a hybrid investing style is well suited to isolate investors and provide protection against sudden market volatility.

As with any investment, so do hybrid funds: the longer the time horizon, the better the chances of creating wealth. But generally, a medium to long term horizon of 3 to 5 years is suitable for investors who want to invest in a hybrid fund.

It would bode well for investors to carefully assess their medium to long term financial needs and choose the right hybrid fund to meet them accordingly.

The author is CBO, Axis AMC

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