Investing in mutual funds can be confusing, especially with the multiple options available. Among the various categories, hybrid funds stand out for their balanced approach by investing in both equity and debt. In India, SEBI categorises hybrid funds into multiple types, with Aggressive Hybrid Funds and Conservative Hybrid Funds being two primary variants.
To understand their differences and how to choose the right one, let’s follow a discussion between two friends, Rohan and Vikram, as they explore investment options:
Vikram: Hey Rohan, I’ve been thinking about investing in mutual funds, but I am very confused. I’ve heard about hybrid funds but don’t really understand how they work. Can you please help me understand the same?
Rohan: Yes, Of course, Vikram!
Hybrid funds are a great way to balance risk and returns because they invest in both equities and debt. The ratio of these investments determines whether the fund is aggressive or conservative.
Vikram: Interesting! What’s the difference between aggressive and conservative hybrid funds?
Rohan: Well, as per SEBI categorization of mutual fund schemes, Aggressive Hybrid Funds allocate a larger portion, typically between 65% and 80% to equities, while the remaining 20% to 35% goes into debt instruments. This means they have higher potential returns but also more volatility. On the other hand, Conservative Hybrid Funds invest mainly in debt, with around 75% to 90% in fixed-income securities and only 10% to 25% in equities. This makes them more stable but with comparatively lower returns.
Vikram: I see. So, an aggressive hybrid fund is closer to an equity fund, while a conservative hybrid fund is more like a debt fund?
Rohan: Exactly! The main difference is the level of risk and return. Aggressive hybrid funds are suited for those who can tolerate market fluctuations for higher growth, while conservative hybrid funds are ideal for those looking for stability and steady income.
Comparison Table
| Feature | Aggressive Hybrid Fund | Conservative Hybrid Fund |
|---|---|---|
| Equity Allocation | 65% - 80% | 10% - 25% |
| Debt Allocation | 20% - 35% | 75% - 90% |
| Risk Level | Moderate to High | Low to Moderate |
| Return Potential | Higher | Lower |
| Investment Horizon | 5+ Years | 2-3 Years |
Vikram: That makes sense. Can you give me some examples?
Rohan: Sure! I use Kuvera for my investments because it offers a user-friendly platform with good fund selection tools. If you’re looking for Aggressive Hybrid Funds, some good options on Kuvera include:
- Motilal Oswal Equity Hybrid Growth Direct Plan: The fund aims at generating equity linked returns by investing in a combined portfolio of equity and equity related instruments, debt, money market instruments and units issued by Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (InvITs).
- DSP Aggressive Hybrid Growth Direct Plan: The scheme seeks to generate long term capital appreciation and current income from a portfolio constituted of equity and equity related securities as well as fixed income securities (debt and money market securities).
For Conservative Hybrid Funds, you might consider:
- Navi Conservative Hybrid Growth Direct Plan: It aims at generating regular income through a portfolio of predominantly high quality fixed income securities and with a marginal exposure to equity and equity related instruments.
- DSP Regular Saving Growth Direct Plan: The fund seeks to generate income, consistent with prudent risk, from a portfolio which is substantially constituted of quality debt securities. The scheme will also seek to generate capital appreciation by investing a smaller portion of its corpus in equity and equity related securities of issuers domiciled in India.
Factors to Consider While Investing in Hybrid Funds
1. Risk Tolerance
If you can handle market volatility for higher returns, go for aggressive hybrid funds. If you prefer stability, choose conservative hybrid funds.
2. Investment Horizon
If you’re investing for five years or more, an aggressive hybrid fund is a good option. For shorter time frames, a conservative hybrid fund is better.
3. Financial Goals
If you’re aiming for long-term wealth creation, aggressive hybrid funds are ideal. But if your goal is capital preservation and steady income, opt for conservative ones.
4. Taxation
You should also consider applicable taxes and the impact of its revisions on your financial goal.
5. Expense Ratio
You should also be aware of the total expense ratio (TER) of the fund, as high costs can impact your returns.
6. Fund Performance
Reviewing past performance could be useful, though past returns don’t guarantee future returns.
7. Market Conditions
Beware of the market volatility—aggressive hybrid funds perform well in bull markets, while conservative hybrid funds provide stability during downturns.
Vikram: That’s a lot to consider. How do I check all these details?
Rohan: That’s where Kuvera is really useful. It provides a comprehensive analysis of each fund, including historical performance, expense ratios, and risk levels. You can compare different hybrid funds side by side and even see their tax implications.
Vikram: Sounds great! Are there any risks I should be aware of?
Rohan: Absolutely. Aggressive Hybrid Funds carry equity-related risks, meaning market downturns can impact their returns. Conservative Hybrid Funds, while generally safer, have interest rate risks affecting bond prices and credit risks if the underlying debt instruments are downgraded or default.
Vikram: That’s good to know. How often should I review my investment?
Rohan: Ideally, once a year or whenever there’s a significant change in your financial goals or market conditions. Regular reviews help ensure your investments remain aligned with your objectives.
Vikram: Thanks a lot, Rohan! I’ll explore Kuvera and start selecting the right hybrid funds for me.
Rohan: No problem! Just remember—investing is a journey, not a race. The key is to stay consistent and make informed decisions.
Wrapping Up
Hybrid funds are a great investment option for those looking to balance risk and return. Aggressive Hybrid Funds provide higher growth potential with increased risk, while Conservative Hybrid Funds offer stability with moderate returns. Using platforms like Kuvera can simplify fund selection by providing all necessary details in one place.
As the saying goes, “An investment in knowledge pays the best interest.” Equip yourself with the right information, and your financial future will be secure!
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