Mutual funds are a type of investment tool where fund houses collect money from investors sharing a common investment objective and invest this pool of fund in various money market instruments like debt, equity, government securities, corporate bonds, etc. In SEBI’s (Securities and Exchange Board of India- the regulator of mutual funds in India) own words, “Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.” Depending on the performance of the market and the sectors where the money is invested, a mutual fund may succeed in returning its investors with either gains or in some cases, loses.
Having said that, mutual funds being equity oriented funds, stand a chance to reap better profits when held for the long run. That’s because, historically, equity investments have proven to bless investors with higher profits when held keeping a long term investment perspective. This is also the reason why most financial advisors emphasize on keeping a long term investment horizon, especially for investors seeking capital appreciation through equity related instruments like mutual funds.
What these financial consultants also advise to young investors is that before narrowing down to any investment decision, it is better that you identify the primary reason for investing. Are you investing with the hope of improving your current financial position, or are you investing to build a commendable retirement corpus for your sunset years, or are you investing to buy that weekend home you always dreamed of? The reason you should have a defined investment objective because it helps you in giving your investments a realistic approach. It helps you in understanding how much money you need to invest regularly, which financial instruments to pick and how many years you might need to stay invested in order to achieve that financial goal.
But before investing in any type of schemes, it is better that you identify your risk appetite. The last thing an investor wants is to invest beyond his / her risk appetite. Hybrid funds are a type of mutual funds which do the job of balancing between returns and risks for investors seeking capital appreciation. There are two types of hybrid funds; equity oriented hybrid funds and debt oriented hybrid funds. Hybrid equity funds are those funds which predominantly invest in equity and equity related instruments and debt hybrid funds are those funds where of the total assets, a majority of the stake is invested in debt and debt related instruments.
Here are a few tips that might help you choose the right hybrid mutual fund:
- What type of investor are you?
An important question which every investor must be asking themselves before making an investment decision. If you are more of a conservative type who don’t wish to take a lot of risks, you may opt for hybrid debt funds. But if you are someone who wishes to give their folio an aggressive touch, you may consider investing in equity hybrid fund.
- What is your investment objective?
If you have an investment objective which is set for the long run, you may consider investing in equity hybrid funds. That’s because equity oriented schemes tend to perform better when held for at least seven to 10 years. For those with a short term investment objective, debt hybrid funds might be suitable for your investment plan.
- How is the hybrid fund performing?
The next thing for investors to compare the hybrid fund with other funds in the same category. Checking the performance of the hybrid fund is essential. Why? Well, it helps investors get an idea if the fund has been successful in giving consistent returns. Remember that consistent returns are any day better than temporary high returns. Although it is true that a fund’s past performance may or may not determine its present and future performance, a proven track record indicates that the fund is in the hands of reliable management.
- Expense Ratio
Owning a hybrid fund comes with some costs. Make sure that the fund you invest in has a low expense ratio. Owning a hybrid fund with a higher expense ratio might have a negative impact on the returns provided by the fund. The last thing you want is paying the fund house a hefty fee while withdrawing or redeeming your mutual fund units.
- Fund manager
A hybrid fund managed by a fund manager with a vast industry experience means your hybrid fund is in safer hands. The role of a fund manager is to use his / her expertise in executing a business strategy, so the fund manages to churn some decent returns. When you invest in a hybrid fund, you are entrusting your money at the hands of the fund manager, and hence it is evident that you invest in a hybrid fund managed by a seasoned fund manager.
We hope that the above pointers come in handy while choosing an optimum hybrid fund. Invest in a scheme that shares its investment objective somewhat similar to yours. If you invest within your limits, and if you stick to your strategy, you stand a chance of getting closer to your ultimate financial goal.