What are Hybrid funds

we are going to talk about hybrid fund

so i think all of us know a thing or two

about construction and cement is the

main ingredient in construction

but uh when we are looking at binding

the bricks together it's not really

cement alone that is used it's a

concrete mixture which is which is a

combination of cement sand gravel which

is small stones and water

and it's all these things put together

that holds the structure together and

depending on the type of construction

and the strength required the

composition of these three elements

would change in the same way every asset

class deed equity gold or debt have its

own merits right so it is only ideal

that to create an ideal portfolio one

could do a combination of these three

asset classes to get the desired results

so let's take an example of an

individual who is looking to invest

money for say three to four years now

someone wants to invest in three to four

years what are the options that are

available to him or her so uh the person

could invest in fds which is fixed

deposits or maybe in equity now equity

have the potential uh to give you

desired results or to give you good

returns in the long term whereas debt

helps in giving stable returns now the

challenge here is that the interest

offered by fixed deposits is relatively

lower and may not beat inflation and at

the same time uh investing in equity for

a ten of three to four years could be

quite risky so the solution in this case

is hybrid funds

hybrid funds as the name suggests is a

combination of debt and equity now in

this particular case you can expect

returns slightly better than fixed

deposit interest and the risk would be

lower as compared to investing in

equities hybrid funds are a combination

of two or three asset classes but the

most common hybrid funds that we see are

the ones which combine debt and equity

so what are the key types of hybrid

funds that we have so we have

conservative hybrid funds aggressive

hybrid funds and dynamic asset

allocation funds or we also call them

balanced advantage funds so now let's

understand these three categories of

hybrid funds that you've just spoken

about so in our discussion we're going

to talk about what's the equity and debt

mixture or a combination in each of

these funds what is the return

expectation from these funds and what's

the ideal investment horizon so let's

start with conservative hybrid funds now

as the name suggests conservative hybrid

funds are conservative in nature which

means they invest a bigger chunk of the

portfolio in debt instruments as

compared to equity so if you look at a

conservative hybrid fund about 75 to 90

percent of the portfolio or of the net

assets of the fund would be invested in

debt instruments and 10 to 25 would be

invested in equity

now the ideal time horizon for these

funds is two to four years

given sufficient time

debt hybrid funds have the potential to

outperform

debt instruments and fixed deposit

returns the table on the screen shows

you historical performance of

conservative hybrid funds and the data

is as of 4th of feb 2022.

now 2020 and 2021 were very good years

for equity investors and the performance

of equity was also reflected in hybrid

funds

but do not have very high expectation in

terms of returns from this category of

funds it's always good to keep lower

expectation so you could expect um you

know from conservative hybrid funds and

fd plus two to three percent kind of

returns

the next category of hybrid funds that

we're going to discuss are aggressive

hybrid funds and again as the name

suggests they're more aggressive in

nature which means aggressive hybrid

funds invest a bigger chunk of the

portfolio and equity as compared to debt

so these funds are also called equity

hybrid funds and here there's a

portfolio allocation of 65 to 80 given

to equity and 20 to 35 allocation given

to debt instruments

now obviously uh since they're 65 to 80

allocation to equity these funds tend to

be more volatile in nature and if the

markets were to go down these funds also

tend to underperform

now since these funds are a little more

volatile it is only uh logical to invest

in these funds for a slightly longer

time period so an ideal time horizon for

equity hybrid funds would be four to six

years

now given sufficient time equity hybrid

funds have the potential to give you

returns closer to equity mutual funds

the table that you see on the screen is

the returns of equity hybrid funds as of

4th of feb 2022.

now the next category of hybrid funds

that we're going to discuss are the

balanced advantage funds because these

funds provide a fine balance between

aggressive hybrid funds and conservative

hybrid funds so these funds are pretty

much like a combination of the two

previous categories

these funds are also called as dynamic

asset allocation funds and that's

because the allocation between equity

and debt is dynamic in nature

the fund has the flexibility to shift

anywhere from zero to hundred percent

between equity and debt based on the

market conditions

now the logic behind shifting from debt

to equity or equity to debt could vary

from fund house to fund house but

essentially these funds sell when the

markets are going up and they buy when

the markets are going down

now by applying this strategy we are

trying to limit the downside and also

participate in the upside of the equity

markets

now the ideal time horizon for uh

balanced advantage funds would be

anywhere between three to six years

now a very important advantage of equity

hybrid funds and dynamic asset

allocation funds is the tax advantage

now both these funds are categorized as

equity funds even though they are hybrid

in nature

now an equity fund has to have at least

65 of the portfolio in equity

instruments throughout the year and

that's exactly what these hybrid farms

do so these two categories of hybrid

funds hold at least 65 of the average

portfolio in a year in equity

instruments hence they are categorized

under equity taxation

now uh to for an investor who is looking

to invest in these categories of funds

should have a medium term time horizon

in mind

also when we are looking from a retired

investor's point of view retired

investors could look at investing in

equity hybrid funds and balance

advantage funds uh for a period of uh

say they could invest in it for a period

of three to four years and then they

could start the withdrawal process

through systematic withdrawal plans

the returns from these funds would

definitely outperform debt instruments

and beat inflation in the long run

now some of the other categories of

funds under the hybrid fund categories

are your balance funds multi-asset funds

arbitrage funds and equity savings funds

so now we'll discuss the first three

funds that we've just spoken about so

under balanced hybrid funds balance

hybrid funds are again a combination of

debt and equity but the maximum

allocation to equity can only be 60

which means balanced hybrid funds lose

the equity taxation benefit now the next

category of hybrid funds that we're

going to discuss are multi-asset funds

and as the name suggests multi-asset

funds invest in three three different

assets which is equity gold and debt

now the weightage given to these three

different asset classes varies depending

on front house to fund house

the chart that you see on the screen is

an asset allocation breakup of a

multi-asset fund as of 31st of december

2021

where equity is given a 70 percent

weightage uh gold is given 11 weightage

and debt is given 19 weightage so even

though these funds are actually a

combination of three different asset

classes these funds are generally equity

heavy with a small allocation given to

debt and to gold

now since these funds are higher in

terms of weightage to equity they are

ideal for the long term and should help

you solve your long term financial goals

the next fund in the hybrid one category

is arbitrage funds

the the meaning of arbitrage as a word

is the ability to generate risk-free

returns by buying and selling the same

asset in different markets

arbitrage fund basically takes opposite

position in equity and equity

derivatives markets with an aim to

generate risk-free return now the ideal

time horizon for these funds is one year

and the returns could be compared to

that of liquid funds but with equity

taxation

investing in hybrid funds is like

getting the best of debt and equity

where debt provides you the stability

and equity provides you the capital

appreciation opportunity compared to

equity mutual funds hybrid funds

definitely are lower in terms of

volatility

so if you're looking at a portfolio

where you want good asset allocation you

also want capital appreciation but with

lower risk then hybrid funds are the way

to go

also just like a concrete mixture

example where different

mixtures and different variations could

produce different outcomes similarly

different combinations of debt and

equity could produce different outcomes

so based on your investment objective

you should be able to select the right

hybrid fund for yourself

so in this particular video we spoke

about hybrid farms in the next video

we're going to talk about the charges

and the different taxations in mutual

funds in general.