Know what is balanced or hybrid funds


If you reach out to a financial advisor, they advise you always keep a well diversified portfolio. Diversification helps mitigate overall investment risk and also allows investors to earn risk adjusted returns. Generally, investors diversify their investment portfolio with debt related instruments to reduce the investment risk of an otherwise equity heavy portfolio. But what if you can invest in a scheme that offers the dual advantage of equity and debt asset class you may consider investing in hybrid funds.

What are hybrid funds?

Hybrid funds are one of kind mutual fund schemes whose underlying securities consist of both equity and debt related instruments. Also referred to as balanced funds, they can be equity oriented or debt oriented depending. The scheme’s portfolio allocation may vary depending on its nature and investment objective. Certain hybrid funds invest in multiple asset classes as well, thus allowing investors to seek adequate diversification through one single investment.

Balanced funds offer retail investors the mix of equity and debt under one umbrella. Their investment objective is to offer returns better than debt schemes while limiting the investment risk and offering risk adjusted returns. The equity component of the scheme aims to generate high returns while the debt component tries to offer the necessary cushion during volatile markets by generating stable returns. These funds are ideal for retail investors who wish to earn long term capital appreciation with minimum investment risk.

What are the benefits of investing in hybrid funds?

  • Balanced funds offer investors true diversification by investing in both equity and debt asset class. Investors do not need to invest in equity and debt funds separately as they can get the benefit of both the asset classes by investing in a hybrid fund.
  • Since these funds invest in debt, they minimize the investor’s overall exposure to the equity markets, whilst trying to generate returns from a well diversified investment portfolio.
  • A hybrid fund manager has the liberty to manage the investment portfolio of the scheme by investing in both asset classes to suit the fluctuating market conditions.
  • They are less risky than equity mutual funds that predominantly invest in equity and equity related instruments.

Since there are multiple types of hybrid schemes with various portfolio compositions, investors can choose a fund that aligns with their investment objective and risk appetite.

What are the two major types of hybrid mutual funds?

Equity oriented hybrid schemes: Equity oriented hybrid schemes are schemes that invest predominantly in equity and equity related instruments. Of their total investible corpus, equity oriented hybrid funds invest at least 65% of their total assets in equity and equity related instruments, and the remaining of the portfolio is invested in debt and debt related instruments.

Debt oriented hybrid schemes: By now you must have guessed that these funds predominantly invest in debt and debt related instruments. Debt oriented hybrid schemes invest a minimum of 65% of their total assets in debt instruments like government bonds, corporate securities, treasury bills, commercial papers, etc. The remaining of the portfolio is invested in equity and equity related instruments.

How to invest in hybrid funds?

Retail investors can either make a one-time lumpsum investment or can start a monthly SIP in any hybrid mutual fund scheme of their choice. Systematic Investment Plan (SIP) is a simple and easy way to invest regularly in hybrid funds. Investors can even use an online SIP calculator to determine the total returns earned through hybrid funds at the end of their SIP investment journey.