Does your asset allocation need hybrid mutual funds?

When it comes to your financial future, building an asset allocation strategy is crucial. You want to choose investments that fit your risk profile, objectives, and long-term goals while also being flexible enough to change over time as you move through different life stages. While traditional portfolios may be constructed with just stocks or bonds, hybrid mutual funds can provide an additional layer of diversification within a portfolio.

If you are wondering whether they should be a part of your strategy, read on to learn more about how they work, their benefits, and how they might fit into your asset allocation plan.

What are hybrid mutual funds? An overview

Hybrid funds are a category of mutual funds that invest in both stocks and bonds (equities and debt securities) in different proportions. The asset allocation reflects the investment objective and market conditions for optimal risk-adjusted returns. They provide the potential for growth through the stock market while providing some protection from losses through the bond portion of the fund.

How can hybrid mutual funds help your asset allocation?

  • A diversified mutual fund portfolio

With hybrid mutual funds, you get access to both equity and debt markets. This means that you can benefit from the growth potential of stocks while also receiving regular income from fixed-income securities like certificate of deposit (CD), T-bills, commercial papers (CPs), corporate bonds, and other money market instruments.

This diversification helps reduce risk by spreading your investments across different asset classes, which can be beneficial during volatile market conditions. For example, even if one asset class underperforms or experiences losses due to market volatility or other factors, other parts of the portfolio may still be able to generate positive returns, which helps offset any losses incurred by other assets.

  • Various types of funds to suit conservative, moderate, and aggressive investors

There are different types of hybrid funds to choose from depending on your risk tolerance and goals for return on investment (ROI).

For example, there are equity-oriented hybrid funds that focus more on stocks than bonds; debt-oriented hybrid funds that focus more on bonds than stocks; dynamic asset allocation funds that shift between equities and fixed-income securities depending on current market conditions.

Similarly, you can choose an aggressive hybrid fund for growth, conservative hybrid funds for stability and low risk, arbitrage funds that capitalise on price differences, multi-asset allocation funds that shift their allocations between multiple asset classes based on market conditions, and more.

Each one offers a unique strategy and approach based on its underlying holdings. So it’s important to do your research before selecting a fund that best suits your goals, preferences, risk tolerance, and return expectations

  • You don’t have to manage different assets separately

By investing in these funds, you can diversify your assets without having to monitor and manage multiple securities separately. These funds combine both equity and debt components into a single fund, with the type of investments varying depending on the scheme. This helps you keep an optimal asset allocation that suits your risk profile while enjoying the potential returns from both the equity and debt markets.

To wrap up

There is no “one size fits all” approach when it comes to asset allocation strategies, but hybrid mutual funds can be utilised as a part of a well-rounded plan. Moreover, with the convenience of digital platforms and mutual funds investment apps, you can quickly research different hybrid funds and begin investing.