The hybrid fund is a type of mutual fund, which is described by a portfolio that is made up of a variety of stocks and bonds that may vary proportionally over time or remain fixed. Hybrid funds can be categorized into domestic hybrid and international hybrid categories. If we talk about the hybrid category, then here the balanced funds tend to stick to a relatively fixed allocation of stocks and bonds. Hybrid funds, which is also known as the balanced schemes invest into some proportion of equity and debt. The hybrid schemes invest at least 65 percent of the corpus in equity.
It is said to be a safer tool to play in the highly volatile market as these hybrid schemes are less volatile than pure equity funds because of their mixed portfolio. In times of volatility, the debt investments provide stability. Hybrid funds are suitable for noob investors as well as for the conservative equity investors in the stock markets.
If you are among those who do not want the hassle of investing in a basket of products that needs to be rebalanced at regular intervals, you can opt for hybrid funds. It is observed that hybrid funds have given good returns in the last few years. As per some studies, in the last three years, balanced funds have returned 18 percent compared to 23 percent returns that are given by the Bombay Stock Exchange Sensex.
Various funds have given more than 25 percent annual returns in the period. Some of them are like HDFC Prudence, Birla Sun Life 95 and Tata Balanced. These funds have performed better than the Sensex by returning more than 10 percent compared to a modest 5 percent rise in the benchmark index in the last five years.
According to veteran experts, hybrid funds do well when stock markets are going through a difficult phase as they have a cushion of debt. Therefore, they are better equipped to withstand shocks in falling markets. On the other hand, when stock markets are rising. It is not necessary that it may perform as well as funds with 100 percent equity component.
With these funds rebalancing based on market conditions also works. Suppose you take a balanced fund with 70 percent exposure to equity and 30 percent to debt. When the stock market falls then the equity exposure of fund will drop to the extent of the fall, and will leave the fund manager with no other option rather than buying more shares to maintain the 70 percent equity level. Here debt provides safety.
It should be noted that different types of hybrid funds follow different asset allocation strategies and returns depending upon how their individual investments perform. Therefore, it is important to ensure that you compare the performance of the funds against the right index.