Table of contents
Hybrid funds offer the best of both worlds: equity’s growth potential and debt’s stability. Read more.
Did you know equity hybrid schemes exceeded their corresponding benchmarks by almost 54% in 2023?
In an unpredictable or volatile market environment, hybrid mutual funds or schemes—which primarily invest in debt and equity—usually perform well.
Hybrid funds invest in various asset types, including international exchange-traded funds (ETFs), debt, stock, and gold, mostly in equity and debt. That said, let’s look into the best-performing hybrid funds of 2023.
What are hybrid mutual funds?
As the name suggests, hybrid funds make a variety of asset-class investments, like equity and debt. Thanks to hybrid funds, you may have a diverse portfolio with only one fund.
Although some hybrid funds include other asset classes in their portfolio, such as gold, etc., most hybrid funds allocate to debt and equity.
Equity can provide substantial returns and wealth creation as an asset type, but it also involves greater volatility risk over the short term. Debt, on the other hand, is a type of asset that comprises interest-bearing securities that provide consistent income.
When it comes to asset classes, debt is more stable than equity. Since debt and equity have little correlation with one another, combining them lowers portfolio risk.
The fund manager consistently keeps a suitable asset allocation in place based on the fund’s goal and market state.
Top 3 types of hybrid mutual funds
As per SEBI, there are 7 sub-categories of hybrid funds, and each category’s fund allocations to stock, debt, derivatives, and commodities differ from one another.
- Multi-asset fund
According to SEBI regulations, multi-asset allocation funds are balanced funds that allocate at least 10% of their portfolio to three or more asset classes. The fund can access various assets and securities, such as gold, bonds, stocks, real estate, commodities, gold, foreign equities, etc.
Thanks to this extensive array of investing options, investors may take advantage of a diversified portfolio and lower volatility risk across all asset classes.
Below is a list of the top 10 multi-asset funds in India, as of April 18, 2024.
- Balanced advantage fund
Mutual fund schemes, known as balanced advantage funds, make investments in both debt and equity instruments. BAFs have no such restrictions and shift their allocations with greater flexibility than typical hybrid funds.
When it comes to asset allocation in BAFs, 40-60% of investments are made in equity and equity related instruments, and 40-60% are in debt instruments.
The best balanced mutual funds employ derivatives to hedge asset allocation and lower risk. However, balanced advantage funds have greater exposure to open stock, which makes them more volatile and susceptible to significant losses during market falls.
Balanced advantage funds may increase portfolio returns without taking on excessive risk and also have tax efficiency benefits.
- Aggressive hybrid fund
Aggressive hybrid funds usually provide a less risky approach to direct equity investing. These funds are essential hybrid funds that combine debt and equity without using any active derivative approaches.
Aggressive hybrid funds invest between 65 and 80% of their total assets in equity, and the rest is invested in debt-based assets. While these products have a lower risk profile than pure equity funds, they perform better in terms of return and risk.
The best aggressive hybrid fund strategies have delivered returns that are both higher than and similar to those of the large-cap fund class. Some of the top-performing mutual funds in this category are Quant Absolute Fund, ICICI Prudential Equity & Debt Fund, and SBI Equity Hybrid Fund, among others.
These funds help buffer your losses, making them excellent choices for many portfolios.
Considerations for hybrid fund investments
Return: The underlying assets’ performance may have an impact on the return on these funds, which have no guaranteed returns.
Investment tenure: The probability of receiving a consistent and greater return from the fund increases with the duration of the term.
Risks involved: The percentage allocation to equity assets in a hybrid fund largely determines its risk. The riskier the fund, the larger the proportion of equity assets in the portfolio, and vice versa.
Investment approach: It’s important to consider the combination of assets selected, the percentage of each asset, and the fund manager’s proposed investing strategy while looking for the best-performing hybrid mutual funds.
Additional costs: Additionally, hybrid funds have an expense ratio charge; the lower the ratio, the less the impact on your investment.
Conclusion
For both novice and experienced investors, hybrid funds are excellent choices because of their exceptional versatility. These funds are equally ideal for first-time investors, retired people, investors with a 3-5-year horizon, and even short-term investors.