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Are Hybrid Funds the Right Bet in a Volatile Market?

Are Hybrid Funds the Right Bet in a Volatile Market?

Market ups and downs are a part of investing in the stock market. This can be due to factors like inflation, economic policies, and even global events. However, the recent tariffs announced by the new US President – Trump have significantly influenced the market, causing a huge dip.

Such volatility can eat into your returns, increasing risk and complicating decision-making.

To handle market ups and downs confidently, you need an investment that strikes the right balance between risk, reward, and stability. This is where hybrid funds come in.

Let’s understand hybrid funds in detail, why they’re a good investment option for volatile markets and the types of hybrid funds you can consider.

What are Hybrid Funds?

Hybrid funds invest in a mix of asset classes, like stocks, bonds, and commodities, to create a well-rounded portfolio. They balance risk and reward, offering high growth potential and stability.

Benefits of Investing in Hybrid Funds in a Volatile Market

Hybrid funds offer a balanced approach to navigating market volatility without compromising growth potential. Here’s how:

1. Safeguards against volatility

Market fluctuations can lower your returns, especially if you’ve invested heavily in equity. Since hybrid funds allocate a part of their investments to debt instruments, they provide a cushion during market downturns, reducing the impact of volatility.

2. Balances returns with stability

Equity investments offer high growth potential, but they also come with high risks. Debt investments, on the other hand, provide stability but may generate lower returns. Hybrid funds provide a balance between the two, offering growth opportunities while maintaining a safety net.

3. Diversification across asset classes

A diversified portfolio helps manage risk more effectively. Hybrid funds spread investments across asset classes, ensuring a single downturn doesn’t affect the entire portfolio. In fact, some hybrid funds even include commodities like gold for greater diversification.

4. Professional fund management

Making right investment decisions can be difficult when the market is highly volatile. Hybrid funds are managed by expert managers who adjust their asset allocation strategies depending on market conditions. This helps you optimise returns without constantly tracking the market.

Types of Hybrid Funds

There are various types of hybrid funds catering to different risk appetites and investment goals. Some common types include:

1. Conservative hybrid funds

These funds typically allocate 75–90% of the portfolio to debt instruments like bonds and the remaining to equities. They are suitable for risk-averse investors looking for steady returns with minimal risk as they provide stability with growth potential.

2. Multi-asset allocation funds

These hybrid funds invest in at least three asset classes: equities, debt, and commodities. By spreading investments across multiple asset types, multi-asset allocation funds provide better risk management and reduce dependency on a single market segment.

3. Aggressive hybrid funds

For investors willing to take on more risk, aggressive hybrid funds allocate around 65–80% of the portfolio to equities, with the rest in debt instruments. This offers higher growth potential while still maintaining some level of stability.

4. Arbitrage funds

These funds invest a portion of the portfolio in equity shares and the remaining in debt instruments. They buy shares in the cash market and sell the equivalent stock futures in the derivatives market, thus ensuring a risk-free return. Compared to the high volatility often associated with pure equity funds, arbitrage mutual funds present a more stable alternative. This makes them an attractive proposition for conservative investors who might shy away from the roller-coaster ride of the equity markets, seeking instead steady growth over high-risk, high-return strategies. 

5. Balanced Advantage funds or Dynamic Asset Allocation funds

These are hybrid funds that dynamically manage their exposure to debt and equity instruments. While equity investments provide market-linked returns, debt instruments offer fixed returns. Since the fund can shift allocation between the two asset classes based on continually changing market valuations, when the markets rise, your funds move to debt instruments. Meanwhile, if the stocks decline, debt securities ensure a steady income. These funds allow participants to participate in the long-term growth potential of equities with much lower volatility.

6. Balanced Hybrid funds

These funds bridge the gap between equity and debt investments. These funds offer investors a diversified portfolio by investing in a mix of equities and fixed-income securities like stocks and corporate bonds in a specific ratio. These funds are designed in a way to rebalance the portfolio automatically in a fluctuating market to retain the fund’s performance. This makes it perfect for investors seeking high returns at low risk and diversification of portfolio.

Wrapping up

Investing in hybrid funds in volatile market conditions is a great way to combine growth with stability. Whether you’re a conservative investor seeking steady returns or a risk-taker looking for equity exposure with a safety net, hybrid funds offer flexibility to suit different investment goals.Invest in hybrid funds seamlessly with Tata Capital Wealth. Leverage tailored investment strategies and expert wealth management solutions to navigate market fluctuations confidently. Visit the website to start investing today.

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