As the name implies, hybrid funds invest in a variety of different asset types, including equities, debt, gold, and even real estate. Most hybrid funds typically experiment with both debt and equity instruments to build a varied portfolio. They divide up their assets between debt and equity so they may reap the rewards of both. While stocks can produce significant profits, they can also be very volatile, whereas debt can produce predictable returns with less risk. This distributes risk in a way that allows debt securities to balance out the detrimental effects of the equities market. Otherwise, when conditions are favourable, the equity can produce good profits.

In addition to being somewhat safer than equity funds, hybrid funds have the potential to produce higher returns than debt funds. However, different hybrid fund types use different ratios of equity and debt instruments, allocating more capital to certain asset classes.

Here are a few well-liked hybrid fund types:

● Equity-oriented hybrid funds:- Between 65% and 80% of their total assets are allocated to equities and securities that relate to equity in equity-oriented hybrid funds. The remaining portion is allocated to the money market and debt-based instruments. A different name for them is aggressive hybrid funds.

● Debt-oriented hybrid funds:- On the other hand, debt-oriented hybrid funds make between 75 and 90 per cent of their investments in debt-based instruments and between 10 and 25 per cent in equity and equity-based assets. Conservative hybrid funds are another name for debt-focused hybrid funds.

● Balanced funds: Equity and debt are split between 40 and 60 per cent in balanced funds.

● Balanced advantage funds:- A dynamic asset allocation fund with investments in debt and equity counterparts that are dynamically managed is called a balanced advantage fund.

● Arbitrage funds:- In order to take advantage of the price differential, arbitrage funds simultaneously acquire and sell assets. These funds are specialist investment vehicles that aim to profit from the differences in stock prices between the derivatives and futures markets. Arbitrage funds are taxed as equity-oriented funds because of this classification. But they experience little volatility. Arbitrage funds, therefore, combine the advantages of equity and debt funds.

Benefits of hybrid funds

Many investors choose hybrid mutual funds because they offer good benefits. These funds offer a number of well-known advantages, including the following:

● Due to the fact that these funds invest in both equities and debt, you can profit from the high returns that stock promises while debt smooths out the volatility. As a result, hybrid funds offer you the benefits of both equity and debt.

● Hybrid funds are ideal for novice investors who wish to test the market. They demand larger returns while having a reduced risk tolerance, a combination that can only be found in hybrid funds.

● Hybrid funds automatically rebalance their portfolio to achieve the scheme's intended asset allocation. This rebalancing delivers you risk-adjusted returns, frees you from trying to time the market, and stabilizes your portfolio.

Things to consider while investing in hybrid funds

Hybrid fund investment has many advantages, but there are also certain things you should watch out for.

● The level of risk associated with investing in hybrid funds is matched to the fund's asset allocation. As a result, examining the fund's makeup can be helpful. You may check out the equities it invests in, for instance. You can check if they are small-cap, mid-cap, or large-cap companies.

● You can also evaluate your personal objectives in light of their timetables and level of risk tolerance and see if they line up with your investments in hybrid funds. You could also look for professional financial counsel to acquire a better understanding of this.

As you can see from the details mentioned above, hybrid funds can give you the best of both equity and debt investing. In addition, they can assist you in achieving financial objectives that complement the risk and return characteristics of the fund.