In order to understand the risk associated with hybrid funds, it is important to first understand hybrid fund meaning and how they are operated. This will give us an idea about what can be done to mitigate the risks associated with these funds.
What are Hybrid Funds?
The hybrid fund meaning can be simply put like this: hybrid funds give investors the opportunity of investing in both equities and debt funds at the same time. The benefit of investing in these funds is that they can yield high returns of equities and balance the risk involved in them with the stability of debt funds. Usually, people either go for equities or debt funds where the former pays off well but with high risk and the latter gives average returns. Hybrid funds, on the other hand, bridge the gap between the two and investors can take advantage of these funds.
Mitigating Risk with Hybrid Funds
Hybrid funds mitigate the risk of equity but at the same time increase the risk associated with debt funds. While you can expect lower risks in hybrid funds than in equities, you can still opt for ways where you can further reduce this risk. They are as follows:
Debt-Oriented Hybrid Funds
Now that we have understood the hybrid fund meaning, it is quite clear from the meaning of hybrid funds that they primarily invest in two asset classes: equities and debt funds. The ratio of investment in these asset classes are varying. But in general, more stress is given to equities where equities hold 60% to 65% and even above and the remaining is debt funds. To mitigate the risk of your investments, you can opt for debt-oriented hybrid funds.
Debt-oriented hybrid funds are those where the majority of investment is done in the debt funds. The remaining percentage is invested in equities and other asset classes. Although this can reduce the returns margin to some extent, in terms of risks, your investment for the most part will remain safe.
Invest for Long-Term
This is a golden rule of investment. If you are worried about high risk in hybrid funds or any other form of investment, the best thing to do is to go for long-term investment. A share market is a volatile place and the fluctuations in the value of equities keep on changing on a daily basis. It might be the case that the equities you have invested in might go for loss in the next few years. But if you keep the goals for the long term, the valuation can be adjusted with the passage of time. So, if mitigating the risk with hybrid funds is in your mind, having a long-term holding period for shares is a good option to go for.
Invest via SIP
One of the safest ways of investing in hybrid funds is via SIP. SIP or Systematic Investment Plan is a mutual fund scheme where instead of investing a lump sum amount at once, you keep investing with small amounts in a gradual manner. The hybrid fund meaning gets a redefinition in terms of risk when you approach it with the SIP method. Invest only an amount which you can keep aside in a month, and this way you will be able to cope with the risks in the long-term without the fear of losing out on a large sum.
These are some of the easiest ways in which you can reduce risks in hybrid funds. But before investing, it is important to be clear about the meaning of hybrid fund and the type of hybrid fund you are going to put your money in. And not just funds, you also have to keep an eye on the fund house through which you have made your investments.