Chapter-5: Hybrid Mutual Fund

5.1          Hybrid Mutual Funds

Hybrid funds are a combination of debt and equity funds. These funds are suitable for initial investors.

5.1.1         Arbitrage Fund

The term arbitrage refers to the simultaneous purchase and sale of an asset in two different markets say cash & future markets to get the profit from inefficiencies across the market and the funds working on these principles are called Arbitrage funds. A few other relevant details are as follows-

ü Cash market is also known as the spot market where transactions are settled on a real-time basis.

ü As per name, the future market is a market where one can buy the right to buy or sell an asset at a predefined price at a future date. The prices of assets may be higher or lower at a future date and this difference is capitalized through the arbitrage market.  

For example, if the stock of company X is 1000 rupees per share at Trivandrum Stock Exchange (TSE) and the same share price is 1100 rupees per share at Lucknow Stock Exchange (LSE), then the arbitrage fund manager will buy the shares at TSE and sells the share at LSE. In such a way, it earns a profit of rupees 100 per share.  

5.1.2         Conservative Hybrid Fund

As the name suggests, these funds invest more portion in FD-like instruments and a few parts of the fund into stock. Such funds have a portfolio of debt and equity securities with a relatively lower risk.

The major characteristics are-

ü Approximately 70-90 % or higher funds are allocated in FD-like instruments to ensure some sort of consistent income and the remaining portion is 10-30% in stock to get higher returns. In this way, it ensures better than FD returns. 

ü Ideal for least risk takers for a time period of 2-3 years.

5.1.3         Aggressive Hybrid Fund

Aggressive mutual funds are hybrid mutual funds where a major portion of the fund is allocated to the stock market while the remaining minor portion is invested in FD-like instruments.

The major characteristics are-

ü The major portion 70-80% is invested into stock while the minor portion 20-30% of the fund is invested into FD-like instruments.

ü The fund manager has given higher autonomy to utilize their expertise.

5.1.4         Balanced Hybrid Fund

Balanced mutual funds are financial instruments that invest in both equity stock components as well as in debt instruments. In general, these funds are investing in the predefined proportion of equity to debt segments.

The major characteristics are-

ü Balanced funds are mostly equity-oriented and invest ~40-50% in stock and the remaining fund amount in debt instruments and ensure the net capital gain.