Why you need hybrid mutual funds in your portfolio: Misconceptions


Hybrid mutual funds are a class of mutual fund schemes which invest in multiple asset classes, primarily fixed income and equity and also in gold and real estate. There are different categories of hybrid funds with different investment strategies and asset allocation.

A Hybrid fund is an ideal investment solution for investors as it provides stability through fixed income and superior returns through equities.

However, there are misconceptions about hybrid funds, which need to be understand.

  • Hybrid funds are not equity funds: Many investors think that hybrid mutual funds are like equity funds and expect equity like returns. When the markets are good, hybrid funds like Hybrid Aggressive funds earlier known as balanced funds can give equity like returns. However, investors should know that higher returns come only with higher risks. However, hybrid funds are less risky due to the debt component in it. Depending upon how the respective assets are performing,some hybrid funds may under perform or outperform equity funds. The key is to invest basis your risk appetite.
  • Hybrid funds are not risk free: Some feel that hybrid mutual funds do not have any risk. Hybrid funds capitalize on equity returns in the long term and limit downside risks in the short term.But in the short term you have to be prepared for volatility.
  • Hybrid mutual funds do not give assured cash-flows: Many senior citizen investors invested in hybrid mutual fund schemes to enjoy regular income by way of dividends. But mutual fund dividends are now taxable and there is no guarantee of regular dividends as it can be paid only from the accumulated profits of the scheme. A regular dividend paying scheme will deplete the accumulated profits reserve, therefore, SWP is better option for regular cash flow from hybrid mutual funds. If your SWP withdrawal rate is lower than the expected return of the hybrid fund category, chances are your principal amount will not deplete.
  • Equity will not always outperform fixed income: Many investors perceive that equity mutual funds give higher returns compared to debt. However that is not always the case as there are instances in the past, when fixed income outperformed equities.Different asset classes outperform or under perform each other depending on market and macro-economic conditions. Hybrid funds reduce volatility and provide stability across different market conditions as they invest in both the asset classes.
  • All hybrid mutual funds are not aggressive: This is one of the biggest misconceptions. Balanced funds or Hybrid aggressive funds are among the oldest categories of hybrid funds. Due to tax treatment compulsions, Hybrid Aggressive are equity oriented mutual funds as it has minimum 65% allocation in equities. There are many hybrid fund categories like Arbitrage, Conservative and Equity Savings which have lesser equity allocation so they are less risky.

The mutual fund industry in India has matured tremendously in the last 25 years or so. One category of mutual funds which deserves more attention and awareness in the Indian retail context is the hybrid mutual funds category. We, in Advisor khoj are committed to raising awareness about investments and mutual funds in particular. In this blog post, we discussed several misconceptions about hybrid mutual funds and hope to clarify doubts which investors may have.

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