Many investors become victims in the investment game because of one mistake they commit, which is not diversifying the investment portfolio. Diversifying the portfolio is just as important as maintaining the funds, as every type of investment has its benefits. Investing money in different stocks can help in times of inflation. The graph of one stock increases when others decrease.
“What you sow, so you reap,” if a person invests in one stock, they are likely to enjoy the benefits and losses as stocks are volatile. Instead, investing in multiple stocks can reduce the risk of losing money. However, every stock investor is a person with patience and long-game players. In the end, these are the people to bag the cash in huge sums.
Hybrid stocks will be a great start if people are looking for multiple investment options as it is less risky when compared to the actual stocks and offers a wide range of benefits.
What is a Hybrid Fund or Hybrid Stock?
Hybrid stock is just like a mutual fund, but instead of multiple funds put together, hybrid stock only comprises more than one or two asset classes but is limited to only three or four. Often a hybrid fund is a combination of debt and equity assets. Sometimes they also include gold and real estate.
Hybrid stocks follow three philosophies for a smooth and successful investment journey. They are
Asset Allocation:
It is the process of understanding the diversification of the invested money into the asset classes.
Correlation:
After dividing the invested money, correlation tells the relation between the prices of each available asset to make better choices.
Diversification:
Diversification is the process of distributing money. After dividing the money and comparing the standards of each asset, more money gets invested in assets that maintain high standards.
The overall aim of the hybrid stocks is to gain high profits in the less money invested. After investing the money, the money diversification is done by the fund managers based on the market condition and the future behaviour of that particular class.
Types of Hybrid Funds:
Based on the investors’ interest and the assets in the fund, the hybrid stocks are of 7 types. They are:
1. Multi-Asset Allocation Fund:
Just as the name indicates, the multi-asset allocation fund contains more than three asset classes with at least 10% invested in each of the classes. These funds come in the combination of equity, debt, and gold or real estate asset classes. Based on the fund manager’s view, the money invested by the investor gets diversified.
2. Balanced Hybrid Funds:
In balanced hybrid funds, the investor should invest a minimum of 40% and 60% at a maximum in both debt and equity classes. The objective of this fund is to provide a long-term income generation strategy through investments in equity classes and provide the risk balance through debt allocation. These funds give a fusion of income, less risk, and moderate capital appreciation.
Since these funds do not exceed 60%, it is better for people with less risk tolerance.
3. Aggressive Hybrid Funds:
Aggressive hybrid funds are also known as equity-oriented hybrid funds. These funds require investments of more than 65% and 80% at a maximum in equity class. And 20 to 35% are in the debt classes. These funds provide higher returns in the long run. Here, the returns are directly proportional to the money invested. The more money is invested, the more returns the investor enjoys.
4. Balance Advantage Fund:
A balance advantage fund is also known as a dynamic asset allocation. In these funds, there is no restriction on investments. Here, the investments are automated. When the market rises, the equity gets exposed more to gain profits. And vice-versa.
5. Conservative Hybrid Funds:
Conservative hybrid funds require investors to invest 10% to 25% of their assets in equity. And 75% to 90% in debt instruments. These funds aim to generate a high income through debt investments. Though conservative funds are a little risky, these hybrid funds are for people looking for high returns.
6. Equity Savings Fund:
Equity savings funds play similarly to bank deposits. Equity funds maintain all the processes that happen in hybrid funds. They keep the balance of risk and returns by investing the derivatives, equity, and debt assets.
These investments require investing 65% to 100% in equity classes and 0% to 35% in debt asset classes. The directionality reduces the volatility of the stock by limiting the exposure of equity funds. While the equity asset class provides growth, the debt and derivative classes deliver stability for the funds.
7. Arbitrage Funds:
Arbitrage funds are the best way for people to invest without worrying about the market condition. Arbitrage funds focus on providing greater returns amid stock market volatility. The fund managers invest 65% to 100% in equity assets and 0% to 35% in debt asset classes. These are the funds for less-risk takers to enjoy better returns in the volatility period.
The Advantages of Hybrid Funds:
Hybrid stocks have features that are unique from other investment features. The advantages of investing in hybrid funds include:
1. Access Multiple Asset Classes:
Instead of finding individual funds, a person can access multiple asset classes in one place through hybrid funds. Since hybrid funds are like mutual funds, the investments are less risky, and the invested money gets diversified based on the fund manager. However, a hybrid fund is not an option for a person who does not want to invest in a mutual fund.
2. Risk Management:
One of the benefits of mutual funds like hybrid equity funds is the risk of the investor of maintaining the stock is done by another person, who earns a little profit when the person buys or sells the particular fund.
3. Diversification:
Though these funds have to face volatility, diversification assures the money’s security. Since the money invested gets divided and distributed to multiple assets, the investment portfolio may not get affected much because a hybrid stock is a collection of different asset classes. If one declines, the other increases. It balances the sheet.
4. Automatic Rebalancing:
Based on the investment type of the investor, there might be market situations where the portfolio of the funds needs to be maintained. In such cases, the fund managers adjust the portfolio according to the market conditions. It will let the investor track the markets.
These are some of the advantages of investing in hybrid funds.
Companies that offer Hybrid Funds in India:
Several factors influence stocks in the stock market. However, the stock price depends on the behaviour of the company. Here are some of the companies that offer best hybrid mutual funds in India. They include:
- Axis Bank
- Tata
- Icici Bank
- Edelweiss
- Canara Robeco
- Kotak Bank
- Quant are some of the organizations that are currently open to hybrid investors.
Things to Consider Before Investing in Hybrid Funds:
Hybrid funds may be less risky investments for anybody. However, it is very crucial to consider a few factors before investing hard-earned money. They are:
Understand the work process:
First and foremost, it is crucial to understand how the market works. The work process of hybrid equity funds is entirely different from the other types. It does not matter how much money a person invests when they do not understand the market. It is futile.
Before investing, the investor should at least have the knowledge to track the portfolio is crucial. If not, the person might end up losing money in huge sums. If a fund manager exists does not mean that the person should invest in it.
Returns:
Unlike other investments, hybrid funds do not promise the exact number of returns. The equity market influences the returns. According to market volatility, fund managers maintain the funds to give the best returns.
Returns are something every debt hybrid equity fund investor needs to care about, as the average returns stand as a pillar to determining the strength of the stock.
Risk:
Understanding by doing their research before investing is a pillar for a successful investment strategy. Multiple hybrid investment types are available based on the investor’s interest and the market. So, going through every method helps to find better stocks that would match the investor’s goals.
Goals:
Just like the other stocks, even hybrid stocks are worth keeping longer. The longer duration the funds are, the higher the returns would become. Understanding the money goals before investing can save a person from losing thousands of rupees.
The person should ensure that their goals are far ahead, like 5 to 10 years from the time they invest.
Charges:
Like mutual funds, even hybrid equity funds charge fees known as the expense ratio for maintaining the funds. The lower the charges are, the better the returns be.
Pick the Best Hybrid Fund:
Hybrid funds are evaluated based on the factors like average returns, management teams, and others. However, the best hybrid stock should have an annual return of 25%, and the investor should also measure the risks taken by the company to achieve that success.
Conclusion:
Hybrid stocks are low-risk investments and one of the most confusing stocks out there in the market. Researching the company and understanding how a person can benefit from investing in debt hybrid funds is the key to successful investing.