Why Risk-Averse Investors Sometimes Prefer Hybrid Funds Over Debt Funds? Find Out

Financial investments could be rewarding as well as risky. So, it's always wise to do extensive research on the risk-reward ratio before investing in any instrument. Based on the risk factors, investments can be broadly classified into three categories — equity, debt, and hybrid funds. But it's not only the risk that determines where investors will put their money. Most investors also evaluate their financial goals and consider their investment horizons.

To cater to the ever-changing needs of investors who wanted to lower their risk but sought good returns, hybrid funds were created. In these funds, investors put their money in a broad class of assets, often a combination of equity and debt.

What are hybrid funds?

Hybrid funds have their portfolios constituted in such a way that they include both equity and debt investments. The right hybrid fund leads to a measured exposure to equity and debt markets and this helps in balancing the risk-reward ratio.

How do they work?

Hybrid funds strive to offer regular income to the investors along with capital appreciation in the long term. A fund manager usually manages these funds. She/he creates a portfolio based on the investment objective of the investor and allocates the funds in equity and debt instruments accordingly. The fund manager operates and makes the day-to-day decisions to buy or sell assets considering the market condition.

Who should invest in them?

These funds are considered riskier than debt funds but safer than equity funds. Several low-risk investors prefer to be invested in hybrid funds because they tend to offer better returns than debt funds. Also, those who are just beginning as an investor should start with hybrid funds to gain exposure to the market while a fund manager takes care of their investment decisions. Those who want to avoid the periodic extreme volatility of the market should invest in hybrid funds as they are cushioned and offer better returns over a long period of time.