The stock market is highly susceptible to fluctuations, so most risk-averse investors turn to hybrid funds. These funds are a combination of equity and debt that can maintain returns through various market cycles. Those looking to balance their risk-reward ratio may consider investing in hybrid mutual funds. However, these funds are available in all shapes and sizes, including fund categories like balanced advantage funds, equity savings funds, aggressive hybrid funds, etc. Moreover, the equity allocation of fund sizes may range from 20 to 80%.

In the following sections, we will discuss different hybrid fund categories and examine factors to consider when choosing one.

What are Hybrid Funds?

As their name suggests, hybrid mutual funds are those funds that constitute their portfolio with different asset classes, prominently debt and equity. They invest money in multiple asset classes based on various permutations of equity and debt based on risk appetite. Moreover, they are auto-diversifiers, meaning they diversify the risk to balance the risk-reward ratio.

Factors to Consider When Choosing a Hybrid Fund

Investors have too many choices when it comes to hybrid mutual funds. To make the investment easier, we explain the most crucial factors to consider when choosing a hybrid fund:

• Exposure to Equity: Understanding the fund’s under-consideration equity exposure is critical. The investors must assess their risk appetite and pick a fund with a risk level syncing with their requirements and risk tolerance levels.
• Age: As a general rule of thumb, subtracting the investor's age from 100 helps decide the equity exposure. For instance, an investor aged 35 has an equity exposure of 65% (100-35). Those ready to bear higher risk levels may consider investing in aggressive hybrid mutual funds.
• Investment Horizon: Investors with a longer investment horizon, like more than five years, may consider choosing an equity-dominated hybrid fund. Likewise, those with a short investment horizon may go ahead with debt-dominated hybrid funds.
• Taxation: Understanding the fund's taxation system is essential, as it largely depends on equity exposure. Hybrid funds with more than 65% equity exposure are taxable as equity funds. Otherwise, the taxation rules of debt funds apply.
• Risk-Return Assessment: Before investing in a hybrid mutual fund, analyse its fund portfolio to measure the risks involved. Understanding the type of stocks that the fund invests in is a vital aspect. For instance, when investing in an equity-oriented fund, one must look at its majority of investments in large, small, or mid-cap funds. This helps assess the risks involved and expected returns.
• Investment Capacity: Some investors invest a lump sum in a mutual fund and wait for it to grow and deliver returns. On the other hand, some investors prefer investing in a mutual fund gradually through a Systematic Investment Plan. In this investment method, the investor contributes a fixed amount at regular intervals and lets the corpus grow. Therefore, one must consider SIP vs mutual funds to make an informed decision suitable to their investment capacity.
• Investment Profile: The final choice of hybrid mutual funds eventually depends on the investor’s investment horizon, financial objectives, and risk appetite. Therefore, they must check their investment profile before choosing a hybrid mutual fund for investment.

Types of Hybrid Funds and Their Suitability

The following are the different types of hybrid funds. However, their suitability differs for investors based on their expected returns, financial goals, and risk appetite. Different types of hybrid funds and their suitability are as follows:

• Balanced Hybrid Funds: Suitable for investors with a moderately conservative risk profile
• Multi-Asset Allocation Funds: Suitable for investors with moderately conservative to moderate risk profile
• Aggressive Hybrid Funds: Suitable for first-time investors with moderate risk profile
• Dynamic Asset Allocation Funds: Suitable for investors with moderate to moderately aggressive risk profile
• Conservative Hybrid Funds: Suitable for conservative investors looking for higher returns than bank FDs
• Equity Savings Funds: Suitable for investors with no tolerance to market volatility
• Arbitrage Funds: Suitable for high-income investors with 3-12 months of investment horizon

Considering factors like investment horizon, goals, and risk tolerance levels are essential when looking for hybrid mutual funds. These investments diversify the portfolio efficiently by giving adequate exposure to debt securities and equity funds. The above factors help select the right hybrid fund to maximise investment returns and achieve financial goals.