Why are Hybrid Mutual Funds Gaining Popularity? Are they Right for You?

In the last few years, the equity market has been volatile due to which pure equity mutual funds have been distressful for the investors. Debt schemes, on the other hand, are doing well but they can only provide limited gains. As a result, hybrid mutual funds have been the most satisfying category of mutual funds in recent years. The inflows in the hybrid schemes are increasing constantly and recently crossed the milestone of Rs 1.80 lac crore for the quarter ending March 2019 compared to 1.70 lac crore for the previous quarter. Aggressive hybrid being the most chosen subcategory followed by conservative hybrid and balanced mutual funds. Does that mean you should switch your equity MF holdings into a hybrid scheme? Read till the end before you make any decision. What are Hybrid Mutual Funds? Hybrid mutual funds deal with more than one asset class while making investments. By investing in a hybrid mutual fund one can get the unified benefits of multiple asset classes which are equity and debt most of the time. Hybrid funds are further divided based on the inclination over equity and debt allocation in the portfolio. An equity-oriented hybrid fund is called an aggressive hybrid scheme while a debt oriented portfolio is called a conservative hybrid mutual fund. The balanced hybrid funds are the ones with nearly equal allocation in equity and debt instruments. The mixed portfolio enhances the diversification and provides better wealth gain opportunities to the investors. Pros and Cons of Hybrid Mutual Fund Pros

• It is less risky than pure equity schemes
• It can provide better gains than pure debt mutual fund
• The volatility in equities gets balanced out by debt tools
• It provides promising returns in medium duration of 3-5 years
• Ideal for retirement planning and child’s education planning

Cons

1. The returns are generally lesser than pure equity schemes in the long term.
2. These funds have no limitations to invest in small, mid, and large-cap stocks.
3. The debt securities can be of any credit ratings.

Hybrid mutual funds have multiple advantages while the limitations can be countered by proper research and analysis of the particular hybrid fund. These funds are most suitable for the ones who are investing for the first time as such investors are generally unfamiliar with the basics of mutual funds and expect decent gains from moderate risk portfolio. Are Hybrid Funds a Right Choice? Investors are preferring to invest in hybrid mutual fund in the current market conditions because the equity market has been volatile. On an average, an aggressive hybrid mutual fund is providing better returns than a large-cap equity scheme while the market has been harsh for the small and mid-cap stocks. Equity mutual funds are ideal for long term investments while a hybrid fund can be chosen for lesser tenure as it provides promising gains. Hybrid mutual funds can be a better choice than equity scheme if the investment tenure is low or the risk appetite of the investor is moderate. These funds provide much better returns than debt schemes. However, if the investment tenure is less than 3 years then the debt oriented hybrid scheme should be preferred. What are the best Hybrid Schemes in the Market? Following hybrid mutual funds have been the better performer than the peers in recent months. These funds have been chosen after extensive research over multiple aspects:-

• Reliance Equity Hybrid Fund
• ICICI Prudential Equity & Debt Fund
• L&T Hybrid Equity Fund
• Mirae Asset Hybrid Equity Fund
• Aditya Birla Sun Life Equity Hybrid 95 Fund

By investing in a hybrid mutual fund, one can utilise the positive market conditions of equity as well as fixed income securities. These funds have always been favoured when the market has been rough for either of the asset class. The selection of the fund, however, must be done according to the suitability of the investors.