Why do some investors prefer hybrid funds over equity?
Would you prefer investing in a hybrid fund over an equity fund? Certain investors have this preference, given that hybrid funds are less risky and offer diversification. Read on to know more about why some investors prefer hybrid funds over equity funds in detail.
What is the key difference between equity and hybrid funds?
Equity funds are mutual fund schemes that invest a majority of their corpus in equity and equity-linked instruments. These are generally high-risk, high-returns investments that generally pose a moderate-to-high risk to the investor. You can also avail tax benefits by investing in equity funds. ELSS (Equity-Linked Savings Scheme) funds, also called “tax-saver” funds, help you benefit from Section 80C of the Income Tax Act that offers a deduction on capital gains earned through the fund.
Hybrid funds, on the other hand, are more “balanced”, in the sense that they mitigate overall portfolio risk by investing in equity and debt-based securities. While the debt component of hybrid funds mitigates the overall risk, the equity component generates high returns. Hybrid funds come in two types – they can be debt-oriented and equity-oriented.
When are equity and hybrid funds suitable?
Equity mutual funds are suitable for long-term equity-linked investments. For instance, if you wish to save up for your retirement, you can start an equity mutual fund investment for the long term that consistently helps you grow your retirement corpus. However, hybrid funds can also cater to short- and medium-term goals. For instance, you can invest in the best hybrid mutual fund and finance the purchase of your dream car in the next 3-4 years. Hybrid funds can be effective in the long run too. You can invest in one of the top 10 hybrid mutual funds and plan for the distant future such as planning your child’s education or for a wedding in the family.
Why do some investors prefer hybrid funds over equity funds?
There are two reasons why certain investors prefer hybrid mutual fund investments over equity fund investments – greater diversification and higher returns. You can diversify your investment portfolio easily by investing in hybrid mutual funds. Diversification helps you reduce the overall risk associated with your portfolio, thereby minimising your losses. Furthermore, hybrid mutual funds help you earn high returns in the medium-to-long term.
Hybrid funds: Points to consider before investing –
Here are some points you must consider before investing in a hybrid mutual fund:
- Assess your risk tolerance: Hybrid funds pose a lower risk when compared to equity funds. However, they aren’t free of risk. You should thoroughly assess your risk tolerance before investing in hybrid mutual funds. Depending on your risk tolerance, you can consider investing in a risky hybrid fund like an aggressive hybrid fund or a debt-oriented hybrid fund.
- Research and compare hybrid mutual funds online and prepare a shortlist: Next, you should research various hybrid funds online and prepare a shortlist of these funds. You should compare the expenses involved in investing in these funds, their past performance, and must also read up on the fund manager’s investing style.
- Prioritise relevant features and select your hybrid mutual fund: After reducing your shortlist to a few funds, you must prioritise the relevant features and select the fund that aligns best with your investment objective.
- Use a mutual fund SIP calculator to calculate the value of your future SIPs: If you are opting for the SIP mode of investment, you should use a mutual fund SIP calculator to know the amount to be invested to meet your financial goal.
- Keep reassessing your investments regularly: You must also keep reassessing your hybrid fund investments to check if they still align with your financial goals. Remember that your financial goals can change over time. You must adapt to these changes by gradually increasing your investment amount.
You must research various hybrid funds online and compare them before investing in a hybrid fund online. You should also assess your risk-taking ability and use a mutual fund SIP calculator to know the value of your future SIPs.
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