Facing the dilemma of debt or equity - try hybrid funds

Juzer GabajiwalaMany individuals invest based on market sentiments. When equities do well, they invest in equity instruments and when these do not do well, the money is diverted to bank fixed deposits. As a result, most retail investors invest at high levels and exit at lower levels. We all understand that to make money in investing you need to invest at a lower price and exit at a higher price – No rocket science, right! But the unfortunate reality is the other way round. This has been the typical investment behavior and is also unlikely to change fast. To avoid this situation, there is a category of funds which balances the risk by investing in a combination of equity and debt. These are popularly called Hybrid Funds. The debt component provides an extra cushion, thereby limiting the risk involved in investing in a pure equity fund. This structural combination offers enhanced flexibility, ensures that the investment is less volatile and provides reasonable returns in the end.  That is why, hybrid mutual funds are a good investment option; specifically when you expect interest rates to go down and equity markets to go up. Hybrid funds are of two types:I. Debt Oriented, also known as Monthly Income Plans (MIPs) andII. Equity Oriented As these funds invest in a combination of equity and debt, they provide investors with an option to invest in a single mutual fund but enjoy a combination of both growth (equity) and safety (debt instruments).

Such diversified holdings ensure that these funds endure downturns in the stock market without too much of a loss compared to an equity fund. However, during a bull market hybrid funds usually increase less in value and provide lower returns than a 100% equity fund.What are MIPs (Monthly Income Plans)?MIPs generally invest 70% to 95% of the corpus in debt instruments and the remaining in equities. MIPs aim to provide a regular income i.e. monthly, quarterly, half-yearly or annual options. A growth option is also available, wherein you do not receive regular dividends but your gains are in the form of capital appreciation. What are Equity Oriented Hybrid Funds?The nature of equity oriented funds is different from MIPs and so is the percentage of investment channeled into debt and equity. These invest higher amounts in equities for the purposes of higher returns while the debt component is low. Around 65% to 75% is in equities while 25% to 35% of the exposure is in debt. The amount of risk involved is less compared to equity funds where the total sum invested ranges from 90% to 100%. These funds do well when stock markets are volatile as they have a cushion of debt. So, they are better equipped to withstand shocks in falling markets. However, when stock markets are rising, they may not do as well as funds with 100% equity component.Let us compare the features of Equity Oriented and Debt Oriented funds:

Conclusion:One may ask why hybrid funds, and why not invest in a pure equity or debt products. The biggest advantage, which may not occur to investors, is that investing in hybrid funds can help avoid the hassles of investing separately in both debt and equity.Moreover, investors should keep in mind that hybrid funds are subject to market risks as both MIPs and Equity Oriented Hybrid funds invest in equities. Neither scheme can guarantee income or returns and one should opt for a fund in line with one’s risk profile and investment objectives.