Things To Know About Hybrid Funds And Who Should Invest In It

Hybrid mutual fund is a category of mutual fund that invests in more than one asset class in a single product. These schemes typically combine equity and debt, while some also cover other asset classes such as Gold. Hybrid funds are equipped with an all-weather long-term investing solution that usually has lower downside risk and is relatively less volatile due to its core benefit of diversification, thereby reducing the risk of over-exposure to one asset class. It also automatically re-balances as the fund manager constantly monitors the fund basis market condition. Hybrid mutual funds offer a gamut of options to investors:

Conservative investors looking for capital preservation and want stability in the portfolio:

Conservative hybrid funds - A conservative investor could choose a combination, which is heavily in debt. Conservative hybrid funds invest 75-90% in debt securities and 10-25% in equity stocks. This can be ideal for relatively risk-averse investors who are looking for regular cash flow while getting little exposure to equity providing marginally higher returns than pure debt products.

Equity Savings Fund - The equity savings fund is another way of diversifying the portfolio as the fund is a prudent mix of equity, debt and arbitrage. An Equity Savings fund allocates a minimum of 65% in equity and arbitrage positions and the balance in fixed income instruments. The arbitrage positions are used to create a hedge in the portfolio and the focus is to generate regular income, whereas the allocation to equity focuses on capital appreciation. Because of this, the fund's equity exposure is partially hedged and the volatility is reduced as compared to the completely unhedged equity exposure in an aggressive hybrid fund. The fund also offers equity taxation.

Moderate risk investors looking to have a balanced portfolio:

Arbitrage Fund - Arbitrage funds take advantage of the price differential of stock either on two different exchanges or between two different markets (the cash and derivative market). By creating an arbitrage position, the fund manager ensures that the spread between the two markets is captured and this translates into returns for the investor. For example, if a stock trades at Rs. 100 in the spot market and the same trades at Rs. 100.50 in futures, the fund manager looks to buy it in the spot market and simultaneously sell it in the futures market. By the time of expiry, the prices converge and the fund manager reverses the transaction and books the price differential (known as spot future spread) minus transaction costs. Arbitrage funds can be an ideal parking place for short-term funds or an alternative to liquid funds to earn reasonable returns.

Seasoned investors who want to look for diversification and ensure downside protection:

Aggressive hybrid funds - A relatively aggressive investor could choose a portfolio which is more skewed towards equity. Aggressive hybrid funds invest 65-80% in equity stocks and 20-35% in debt securities. This can be a good starting point for first-time investors, who want to stay away from the volatility associated with pure equity products.

Dynamic Asset Allocation or Balanced Advantage Fund - A Balanced Advantage Fund or a Dynamic Asset Allocation Fund, is Hybrid Mutual Fund which invest in a mix of debt and equity depending on market movements. It provides the benefit to investors of not having to time the market levels. It is well suited more for uncertain markets. As it invests in multiple sectors, it diversifies the investment and gives exposures to various sectors and balances funds to the sectors favourable at that point in time.

People who want to diversify in more than two asset classes, this is an all season fund:

Multi-Asset Allocation Fund - A multi-asset fund invests in at least three different classes with a minimum of 10% allocated to each. A mix of three asset classes can help the investor attain the goal of asset allocation via a single product. Also, since every asset class behaves differently, diversification safeguards the portfolio against downside risk emerging from exposure in a single asset class. A mix of asset classes which typically have a low correlation with each other can be a good way to generate reasonable returns with low levels of volatility.

Who should consider investing in Hybrid Funds?

Due to the clear benefits that hybrid funds offer, new investors who are looking to get exposure to equity markets while also balancing it with safer assets can consider starting with Hybrid funds. Experienced investors can also invest in it to give a new dimension to their portfolio basis their goal, risk profile, investment tenure, management style, etc.

In a nutshell, it aims to provide active asset allocation, better risk-adjusted returns & efficient taxation. The inherent flexibility of hybrid funds is its core advantage because of which hybrid investments have naturally begun to be more favoured. Investors should compare these plans with their investment needs and pick the ones that best address them.

-Ends-
Sources: Axis AMC Research

Disclaimer: This press release represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
The information set out above is included for general information purposes only and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws as certified by the mutual funds consultant. Any action taken by you on the basis of the information contained herein is your responsibility alone. Axis Mutual Fund will not be liable in any manner for the consequences of such action taken by you. The information contained herein is not intended as an offer or solicitation for the purchase and sales of any schemes of Axis Mutual Fund.

Past performance may or may not be sustained in the future.

Stock(s) / Issuer(s)/ Sectors mentioned above are for illustration purpose and should not be construed as recommendation.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

-Ends-

Author: Ashwin Patni, Head Products & Alternatives, Axis AMC.