WHAT ARE HYBRID MUTUAL FUNDS?
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| Mutual Funds |
Before Savepro makes you understand the
worth of hybrid mutual funds, lets us first know what equity mutual funds and
debt mutual funds are.
In the case of equity mutual funds, the
investments are made in stocks and equity shares of companies in order to seek
capital appreciation. Though the risk is high,this fund has more significant
potential to generate high returns.
Debt mutual funds majorly invest in debt
securities, corporate bonds, treasury bills, and money market instruments in a
view to generating regular income.Though they are far less risky compared to
equity funds, they lack the earning potential that equity funds have.
Hybrid mutual funds try to bridge the gap
between the two by diversifying the investments. They have the best of the two
schemes. Hybrid funds achieve capital appreciation through equity investments,
and stability and returns through investments in debt instruments. The fund
houses ensure maximum profits at minimum risk through asset allocation, market
analysis, and portfolio diversification.
Equity-oriented and debt-oriented hybrid
mutual funds are classified depending on the fund invested in each of these
funds. When over 65% pure investment is done in equity funds and the remaining
in debt instrument, it is known as an equity-oriented hybrid mutual fund.
Conversely, the one where over 65% pure investment is done in debt instruments
and the remaining in the equity fund, it is called as a debt-oriented hybrid
mutual fund.
Investment in hybrid mutual funds is on the
rise these days among risk-averse investors since these funds try to multiply
the wealth and minimize risk.
FUNCTIONING
OF HYBRID MUTUAL FUNDS
In order to reap the benefits of the two
different worlds, investment acumen and experience of investing in different
asset classes are required. The scheme needs to be managed in such a way that
it generates capital appreciation in the long term and income in the short
term. For long-term appreciation, the scheme will invest in equity stocks of
companies, and for short term returns, the plans will invest in debt
instruments or government bonds.
HYBRID MUTUAL FUNDS ARE FOR WHOM?
Hybrid mutual funds have been designed for
a broad spectrum of investors. Depending
upon the fund mandate and the type of fund, fund houses efficiently allocate
funds in the right proportion between different asset classes and companies.
The market houses seasoned investors who
have been investing for quite sometime despite positive or negative gains. If
they decide their risk profile and goals,hybrid plans offer assured benefits in
their next investments.
One can totally rely on hybrid mutual funds
for their benefits, such as active risk management, portfolio diversification,
and asset allocation.
METHODS OF INVESTMENT IN HYBRID MUTUAL
FUNDS
If you've made up your mind for investing
in hybrid mutual funds, you can optfor two different ways given below:
- Lump sum investment
- Systematic Investment Plan (SIP)
1) Lump Sum Investment: As the name
suggests, if you have a lump sum amount to invest, you can invest it in a
single go in this fund.
2) SIP: If you wish to invest a small
amount on regular intervals for a specific period, you can go for SIP. You can
arrange auto deduction of a certain amount from your account say for the next
six months or so.
TYPES OF HYBRID MUTUAL FUNDS
1) Equity-oriented Hybrid Mutual Funds:
This is a balanced funds scheme which
assigns over 65% of the investment resources in purchasing equity stocks of
companies. The balancing 35% or so is invested in debt securities or other
opportunities. This permits the investor to discover the possibility of high
returns and reduce exposure to the risk at the same time.
2) Debt-oriented Hybrid Mutual Funds:
This can be termed as a monthly income
plan, which assigns over 75% of their sources in bonds, treasury bills, money
market instruments, and other debt instruments. The remaining 25% or less is
allocated in equity stocks on companies and cash/cash equivalents. This plan is
suitable for those who seek regular income in the form of a dividend that is
paid out at different intervals. The dividend payment depends on the investor’s
choice - annually, semi-annually, quarterly, or even monthly. You can also go
for a “growth option” by reinvesting the dividends for capital appreciation.
3) Arbitrage Funds:
In this method, the same shares are sold
and purchased simultaneously indifferent markets in order to exploit the
difference in the trade value of the shares to generate profitable gains. In
this fund, shares are bought in the cash market and simultaneously sold in the
future markets to make use of the price differential to create a profit.
How do arbitrage funds work?
Suppose you purchase Rs 10,000 worth of
equity in the cash market. You will own the shares of the target company as
soon as the trade is complete.The future market reflects the projected value of
the stock on a specific date in the future, based on the calculations.
So, decide carefully, in which instrument
you will be investing? If not, a small tip for you,‘please read all
scheme-related documents carefully’ and then go ahead with the plan. Don’t
forget to give us a call in case you have any issues!
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