Most investors prefer to invest in hybrid funds for the diversification it offers to their investors. Balanced funds or hybrid funds are a type of mutual funds that invest their securities in more than one asset classes. Usually, a hybrid mutual fund invests in both equity and debt funds. They do this get the best of both worlds by chasing high returns like equities and low volatility like debt instruments. But what are the key investment strategies to invest in hybrid mutual funds? How do you decide which fund is right for your investment portfolio? What can you expect from your hybrid mutual fund investments? Let’s unravel these questions related to hybrid funds in this article.
There are three hybrid fund strategies that an investor must be aware about. These key investment strategies are Balanced advantage funds (BAF) or Dynamic Asset Allocation Funds (DAAF), Aggressive hybrid funds (AHF), and Equity savings funds (ESF). While all these three key investment strategies invest in a mix of equities and debts, there are fine differences in these strategies that you must be aware about.
Dynamic asset allocation funds or Balanced advantage funds
These hybrid funds invest in a mix of fixed-income instruments and stocks. But what makes these funds different from the usual hybrid funds is that unlike regular balanced funds, BAFs or DAAFs do not invest in debts and stocks in a fixed percentage. So, according to the market conditions, these funds change their allocation in different asset classes. Asset management companies (AMCs) often create in-house asset allocation models based on certain parameters such as price-to-book ratio (P/B ratio), price-to-earnings ratio (P/E ratio) and certain technical parameters such as volatility in the markets and daily moving averages.
Aggressive hybrid funds
These balanced funds are mandated to invest at least 65% and up to 80% of their assets in equities and equity-related securities, and the remaining in debt instruments. In general, aggressive funds invest around 75% in equities at average and the rest 25% in debt securities. This asset allocation is intermittently rebalanced to ensure that the equity allocation does not exceed more than 80%.
Equity savings funds
Equity savings funds are a type of balanced funds that invest their assets in debt, equity, and arbitrage opportunities. The arbitrage component is what makes them different from regular hybrid funds. The fund manager of an equity savings funds actively looks for opportunities to exploit the pricing ineptitudes that exist in the derivates and cash segments of the equity sector. As these mutual funds invest in three asset classes, these balanced funds lean towards more conservative approach to investing as compared to aggressive hybrid funds or dynamic asset allocation funds.
Just like any other types of mutual funds, returns on mutual fund investments should not be the deciding factor to choose the right mutual funds for your portfolio. You must make sure that the objectives of the fund are aligned with your financial goals, risk profile, and investment horizon. Hope this article will help you choose the right balanced funds for your investment portfolio. Happy investing!