In the ever-fluctuating landscape of the Indian financial markets, investors often seek strategies to counter volatility while maximizing returns. One such avenue gaining prominence is investing in hybrid funds.
These funds, often referred to as balanced funds or hybrid mutual funds, offer a unique blend of equity and debt instruments that aim to provide stability, growth potential, and risk mitigation.
In this blog, we’ll explore what is hybrid fund with its benefits in countering market volatility, delving into balanced advantage funds as a prime example.
What is Hybrid Fund?
A hybrid fund is a specific type of mutual fund that diversifies its investments across multiple asset classes. These classes often include equity and debt assets, and in some cases, they may even incorporate gold or real estate.
These funds are built on three core principles: asset allocation, correlation, and diversification. Asset allocation involves spreading investments across different asset classes, correlation refers to how returns move among assets, and diversification involves including multiple assets in a portfolio.
Hybrid Fund Types
Multi Asset Allocation Fund: They invest in at least 3 asset classes with a minimum of 10% each. Asset allocation is decided by the fund manager based on their view.
Aggressive Hybrid Funds: These invest 65-80 per cent in equity and 20-35 per cent in debt, offering the potential for high returns with reduced risk.
Dynamic Asset Allocation or Balanced Advantage Fund: These dynamically shift between 100% debt to 100% equity based on a financial model, suitable for investors seeking automated asset allocation.
Conservative Hybrid Funds: These funds invest 10-25% in equity and the rest in debt to generate income from debt with a small equity component for enhanced returns.
Equity Savings Fund: These balance risk and returns by investing in equity, derivatives, and debt, aiming for stable returns with reduced volatility.
Arbitrage Fund: This strategy involves buying in the cash market and selling simultaneously in the futures market to exploit price differentials. It offers stable returns with reduced volatility, which is suitable for low-risk investors.
Hybrid Fund: Advantages
Balanced advantage funds, a subset of hybrid funds, employ dynamic asset allocation strategies to navigate market volatility. These funds adjust their equity-debt allocation dynamically based on prevailing market valuations, aiming to capitalize on opportunities while mitigating downside risk.
By adopting a flexible approach, balanced advantage funds seek to deliver consistent returns across market cycles, making them an attractive choice for risk-conscious investors.
Countering Volatility with Hybrid Funds
Diversification: Hybrid funds offer investors a diversified portfolio comprising both equity and debt instruments. During periods of market volatility, the stability provided by debt investments helps cushion the impact of equity market downturns, thereby reducing overall portfolio volatility.
Dynamic Asset Allocation: Balanced advantage funds leverage dynamic asset allocation strategies to adjust their equity exposure based on market valuations. During bullish phases, these funds may increase equity allocation to capitalize on growth opportunities. In contrast, during bearish phases, they may reduce equity exposure to limit downside risk.
Risk Mitigation: The combination of equity and debt components in hybrid funds helps mitigate various types of risks, including market risk, interest rate risk, and credit risk. This balanced approach enhances the overall risk-adjusted returns of the portfolio, making it less susceptible to extreme market movements.
Stable Returns: Hybrid funds aim to deliver stable returns over the long term by striking a balance between growth and income. While equity investments provide the potential for capital appreciation, debt investments offer regular income through interest payments, thus providing a steady stream of returns even during volatile market conditions.
Final Word
It’s essential to note that while hybrid funds aim to reduce volatility, they do not eliminate it. Investors should still be prepared for fluctuations in the value of their investments, albeit to a lesser extent than those who invest solely in equities.
Additionally, it’s crucial to assess the fund’s investment strategy, historical performance, expense ratio, and the reputation of the fund house before investing.
