Mutual funds are categorized in accordance with their unique characteristics like investment objective/strategy, fund size, risk profile, asset allocation, etc. These are professionally managed funds that invest in marketable securities across various assets like debt, equity, treasury bills, corporate bonds, etc. A lot of people confuse mutual funds with its subcategory that is equity mutual funds. But the truth is there is more to mutual funds than pure equity investments. There are debt funds which invest in debt instruments like call money, government securities etc. and are considered to be a lot less volatile as compared to equity mutual funds.
Depending on an investor’s risk appetite and the financial goal, he/she should identify certain schemes whose investment objective matches with that of theirs and then narrow down to a final investment decision. There are some mutual funds that invest a certain portion of their assets in both equity and debt instruments in order to meet the scheme’s investment objective. These are known as hybrid funds.
However, there are a lot of misconceptions regarding hybrid funds because of which several investors refrain from investing in these funds. Here are five misconceptions about hybrid funds which are totally not true:
- Hybrid funds do not invest in equity markets: When they are at their peak, hybrid funds may give similar results like equity oriented funds, and that’s because these funds follow an aggressive investment strategy by diversifying their assets among both equity and debt instruments. But remember that equity funds which predominantly invest in equity markets carry a much higher risk as compared to hybrid funds which carry a comparatively low risk profile. Although both invest in equity markets, investing in hybrid funds makes a lot more sense.
- Hybrid funds offer assured returns: Yes, it is true that hybrid funds carry a low risk profile, but remember that they are a category of mutual funds. Hybrid funds are a mix-match of debt and equity related instruments, and hence there is a very rare chance of an investor bearing losses. Though historically hybrid funds has offered investors with decent returns, no scheme guarantees investors with returns.
- Equity investments will always outperform fixed income securities: Although equity holds the potential to offer investors with higher returns remember that they are a high risk investment, and investors can lose their money as well. On the other hand, there have been times when debt instruments have outperformed equity. It all depends on how the market affects the various sectors and hence no hard and fast rule defines equity to outperform debt in all situations.
- Hybrid funds are completely risk free: Although hybrid funds are considered to be less risky than equity funds, they cannot be considered as a complete risk free investment. After all, they are a mutual fund subcategory, thus giving their exposure to the dangers of volatile markets. Hence, it is impossible to claim any mutual fund investment a risk free investment.
- You should only invest in hybrid funds to meet your goals: Yes, investing in hybrid funds may be a good option, but only investing in these funds may not be a completely great idea. It is advisable that you have a diversified portfolio and have a mix and match of several mutual funds so that you can give your investments some liquidity.
Investing in mutual funds is a long journey. Whether you want to invest in equity, debt or hybrid funds will totally depending on what you wish to achieve through these investments. Make sure that no matter, where you invest, you have a defined investment strategy and only invest in those funds which hold the potential to help you get closer to your ultimate financial goal.