Choosing right hybrid fund: Risk appetite, horizon should guide your choice

Hybrid funds are gaining traction amid ongoing volatility in the equity market. The recent Motilal Oswal Private Wealth (MOPW) report, Opportunities in Uncertainty, also advocates a hybrid investment strategy for the first half of 2025. 

Suited to volatile markets 

Hybrid funds provide a structured way to handle market fluctuations. “These funds aim to capitalise on potential equity upside while cushioning the fall due to allocation to fixed-income securities,” says Farhad Gadiwalla, executive vice-president & head-products at UTI Asset Management Company (AMC). These funds can mitigate risk.  

“Hybrid funds are becoming increasingly attractive in the current environment due to their ability to offer diversification and risk mitigation,” says Mohit Gang, co-founder and chief executive officer (CEO), Moneyfront. 

Diversification advantage 

Their key advantage is diversification. “Investing in different asset classes with zero or low correlation helps diversify risk and reduce volatility,” says Jayesh Faria, regional business head, Motilal Oswal Private Wealth. 

A mix of asset classes ensures better risk-adjusted returns. “Market shocks in equities do not have an outsized impact on the portfolio,” says Gadiwalla. Some hybrid fund categories enjoy equity tax treatment. 

“Hybrid funds tend to offer better returns than debt funds, prompting many low-risk investors to opt for them,” says Gang. 

Potential downsides 

Hybrid funds may not appeal to high-return seekers during bull markets. “In such phases, equity strategies would deliver superior returns,” says Gadiwalla. 

The fixed-income portion of these funds could carry credit and interest rate risks. Dynamic asset allocation, a strength of some of these funds, could also lead to suboptimal results if the fund manager’s decisions are not in sync with market conditions.  Maintaining a fixed asset allocation at the investor’s portfolio level can become difficult with some categories. 

Sub-category selection   

Selection of sub-category should match the investor’s risk appetite and investment horizon, and not be based on past returns alone.

 

Conservative hybrid funds: They offer 10-25 per cent equity exposure. “They are ideal for generating regular income for investors with low risk tolerance,” says Gang. 

Balanced hybrid funds: These funds come with 40-60 per cent equity exposure. “They provide moderate growth with controlled volatility,” says Gadiwalla. 

Aggressive hybrid funds  These funds offer 65-80 per cent equity exposure. “They deliver returns comparable to the broader market while experiencing significantly lower drawdowns,” says Faria. 

Dynamic asset allocation funds: Also known as balanced advantage funds, they adapt equity and debt exposure to market conditions, and are ideal for those who prefer flexible strategies. 

Equity savings funds: They offer 30-50 per cent equity and arbitrage exposure. “These funds offer a tax-efficient alternative to debt funds,” says Gadiwalla. 

Multi-asset allocation funds  These funds must have at least 10 per cent exposure in minimum three asset classes, including equity, debt, commodities, and real estate investment trusts (Reits).  

“They provide broad diversification and inflation hedging,” says Gadiwalla. 

Conservative hybrid and equity savings funds are suited for short-term, low-risk investors. Balanced hybrid, balanced advantage funds are suited for medium-term investors, while aggressive hybrid and multi-asset allocation funds work best for those with long-term goals. 

Should you go for them? 

Novices and conservative seeking a less volatile experience with equities may opt for these funds. Those seeking pure equity exposure for high returns, or fixed returns with zero volatility, should avoid them.