What are hybrid funds?
In biology, hybrids are offsprings of either a plant or animal from two different species or varieties. For example, a mule is an offspring of two different animals: donkeys and horses. In general, a hybrid refers to a mixture of anything that comes from combining two different elements. We also have this in finance and investments, and we call them hybrid funds.
If we describe hybrid funds, we can say that they are characterized by diversification among multiple asset classes. It is an investment fund that usually invests in a combination of stocks and bonds. These funds are ideal for investors who seek diversified portfolios. As the name hybrid suggests, the strategy involves investing in multiple asset classes. However, some may be thinking about something else when you say hybrid funds. It may also refer to funds that use an alternative approach for mixed management.
Stemming from the Modern Portfolio Theory
Some people refer to them as allocation funds. There are many ways to use asset allocation funds. Also, it may serve different purposes in the investment market. Investors have the freedom to choose when investing in multiple asset classes using a single fund. Have you heard of the Modern Portfolio Theory? As soon as it was implemented, many things came out of that theory, and hybrid funds were one of them.
The different kinds
Hybrid funds are flexible, and you can choose depending on your risk tolerance. There are options for the conservative, moderate, and aggressive when it comes to risks. Let us meet the different types of hybrid funds:
- Target date funds. They invest in multiple asset classes for a diversified portfolio. They are not the same as the standard hybrid funds. Their portfolio starts with a more aggressive allocation. Later on, the progress shifts to a more conservative allocation for use by a specific utilization date. Others refer to target-date funds as life cycle funds.
- Balance funds. They follow a standard asset allocation proportion. One of the most popular ones includes the 60/40.
- Blended funds. They are mutual funds for equity which is a mix of both growth and value stocks. They offer diversification among these investment styles in an individual portfolio.
Tell me more about hybrid funds.
Hybrid funds generally have a mix of two or more asset classes. Allocations stay the same at a fixed proportion in risk-targeted and balanced funds. On the other hand, the asset mix proportion will change in the long run for funds that target a specified utilization date. Overall, the investment manager has the power to manage individual holdings within every asset category actively. This is a response to the dynamic market conditions and possible capital appreciation opportunities.
A little summary of today’s learnings
A hybrid fund is an ETF or a mutual fund that invests in different asset types of classes to have a more diversified portfolio. A typical example of a hybrid fund is the balanced fund. It is usually comprised of 60% stocks and 40% bonds. We also have blended funds that mix growth and value stocks.