Where to invest our money and how to go about investing is always a challenge. The biggest obstacle is our fear. Fear of losing our hardearned money and savings in the quest to make more money. Our fears can be addressed by stepping out of our comfort zone and acquiring knowledge on the subject. Mutual Funds to most of us is too complex to understand.
There are four types of Mutual Funds based on assets class – Equity Funds, Debt Funds, Money Market Funds and Balanced or Hybrid Funds. Let’s first understand what a Hybrid Fund is :-
Hybrid mutual funds invest in more than one asset class. They are a combination of Equity, Debt, Stocks, Bonds, Gold & Real Estate assets. The key philosophies behind hybrid funds are – asset allocation, correlation, and diversification. Asset Allocation is the process of deciding how to distribute wealth among various asset classes. Correlation is the co-movement of returns of the assets, and diversification is to have more than one asset in a portfolio.
The different types of Hybrid Funds are:
• Conservative Hybrid Funds
• Balanced Hybrid Funds
• Aggressive Hybrid Funds
• Dynamic Asset Allocation Fund / Balanced Advantage Funds
• Multi-Asset Allocation Funds / Arbitrage Fund
• Equity Savings Fund
Hybrid Funds aim to achieve wealth appreciation in the long-run and generate income in the short-run via a balanced portfolio. The Fund Manager allocates money in varying proportions in equity and debt based on the investment objective of the Fund.
Dynamic Asset Allocation or Balanced Advantage Funds is one of the categories under Hybrid Funds. Its main advantage is its flexibility to move across asset classes. The Fund Manager allocates more to equities when valuations are cheap and less to equities when the valuations are expensive.
The allocation between equity and debt is “dynamically managed”, meaning that the money is moved between asset classes depending upon the valuation models used by them. Investing in these funds can give you a long-term wealth potential as well as a cushion against the downside in case of falling equity markets.
The biggest advantage of a hybrid mutual fund is that it allows you to balance risk and return. The equity portion will earn better returns, and the debt part will earn steady returns at lower risk. You can also choose the mix of equity and debt that is suited for your investment objectives.
We hope you have learnt something new today, as it is our constant endeavour to educate and make an ‘investor’ a ‘sound investor’! Happy Investing!
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