Why do some investors prefer hybrid funds over equity funds?

When it comes to investing, everyone has their own strategies, preferences, and risk appetite. While some investors prefer high risk, high returns with equity funds, others prioritise safety and stability, leading them to choose debt funds. But what about those who want a balance between risk and safety? After all, there are also investors who want to strike a balance between their desire for high returns and fear of losses. This is where hybrid funds help.

While equity funds are the go-to option for many investors to get exposure to the stock market, hybrid funds are slowly emerging as a better alternative. Let’s explore the reasons why some investors prefer hybrid funds over equity funds and the benefits of investing in these schemes.

Better risk management

As hybrid funds invest in multiple asset classes such as equity, debt, and gold, they offer a diversified portfolio that spreads the investment risk across different markets and sectors. Equity funds focus primarily on stocks and are therefore more vulnerable to market volatility and fluctuations. 

The diversified portfolio of hybrid funds provides a cushion against volatility, enabling them to deliver more stable returns, making them an ideal option for investors seeking a balance between risk and return.

Suitable for all risk profile

There are different types of hybrid funds and each one comes with a different risk profile, returns, strategy, objectives, and features.

• For conservative investors, a conservative hybrid fund can be a good option as it invests predominantly in debt instruments like bonds and fixed-income securities. 
• Aggressive investors may prefer an aggressive hybrid fund that invests more in equity instruments. 
• Moreover, dynamic asset allocation funds or multi-asset allocation funds follow a strategy that adjusts the portfolio’s asset allocation based on changing market conditions, mitigating risk and optimising returns. 
• Arbitrage funds aim to generate returns by leveraging price differentials in the cash market and the futures market. 
• Equity savings schemes invest in a mix of equity, debt, and arbitrage opportunities to help investors earn returns and create long-term wealth.

This flexibility allows investors to customise their investment strategy to match their personal goals and risk appetite.

Reduced dependence on stock markets

Hybrid funds invest in equities, debt instruments like bonds, and even gold. While equity funds majorly invest in stocks, leaving investors exposed to the volatility of the stock market, hybrid funds offer a combination of equity and fixed-income investments that provide stability and steady returns. The debt portion of hybrid funds acts as a safety net, reducing the risk associated with equity investments. 

This reduced dependence on stock markets provides investors with a diversified portfolio that can help them achieve their goals.

Auto rebalancing

Hybrid mutual funds, such as the dynamic asset allocation fund and multi-asset allocation fund, adjust their investment allocation based on current market conditions using an internal investment model. This means that the portfolio automatically adjusts itself to maintain the desired asset allocation, reducing the need for constant monitoring and intervention by the investor. 

This offers investors a more strategic and systematic approach to investing, as well as the potential for better returns and risk management. 

Final words

The unique advantages of hybrid funds include diversification, reduced risk exposure, and the potential for higher returns. However, both equity and hybrid funds can be used to create a diversified mutual fund portfolio. In fact, you set up a systematic investment plan (SIP) in hybrid and equity funds to gain long term benefits. 

To get more guidance on how each option fits your goals and investing style, it is advisable to consult a financial advisor. They can guide you on the suitability of these funds based on your investment goals, budgetary constraints, and expected risk-return metrics.