Hybrid mutual funds: What are they and why do they matter in 2025?

Hybrid mutual funds are funds that invest in multiple asset classes. Their investments constitute a collection of equity, debt, gold and even real estate. This kind of planned diversification while investing helps in managing risk and returns. Hence, ensuring both growth potential and stability making the case for them as solid investment options for 2025.

Why should hybrid funds be considered?

It is crucial to note that these funds primarily follow three key principles of diversification, correlation and asset allocation. Hence, by combining assets with low correlation on a historical basis (for example equity and debt) they bring down the overall portfolio volatility and risk while making the most of each asset class's strengths.

What are the different kinds of hybrid funds?

Multi-asset allocation funds: This particular fund focuses on investing in at-least three different asset classes with a minimum of 10% investment in each of them. This process hence facilitates risk management through broad based diversification.

• Aggressive hybrid funds: As the name suggests these are funds that take on a higher amount of risk by having about 65-80% exposure in equities along with 25-30% exposure in debt. These funds hence offer better returns in comparison with others, while carrying a higher potential of capital depreciation due to higher equity exposure.
• Dynamic asset allocation funds: This is a unique hybrid fund which offers flexibility to shift between equity and debt based on prevailing market sentiment. Hence, if we have pessimism in the market money automatically moves into debt for capital conservation and vice-versa.
• Conservative hybrid funds: Conservative hybrid funds are investments that are the opposite of aggressive hybrid funds. They focus on putting 75-90% of the capital in debt for income stability. Whereas the remaining 10-25% capital is deployed on equities for a modest growth boost.
• Equity savings funds: This hybrid fund primarily focuses on managing volatility by diversifying in derivatives, equity and debt. This diversification helps in balancing volatility and boosting returns.
• Arbitrage funds: These funds focus on exploiting price differences in cash and futures markets. This facilitates in delivering stable debt-like returns. These funds are suitable for low risk investors.

What are the key points to consider before investing in hybrid funds in 2025?

• Returns in these funds depend on market performance and equity-debt allocation.
• Risk increases with higher equity exposure but varies across fund types.
• One should invest only with a medium-term horizon (3–5 years).
• Background checks like past returns, portfolio allocation, fund managers etc., must be done.
• Expense ratios, convenience charges, impact returns; opt for funds with reasonable fees.

Therefore, in 2025’s evolving markets, hybrid funds can be your go-to solution for balanced, diversified growth. All it needs is a proper understanding of the asset class and making informed decisions. It is also advised for aspirational investors to consult professionals before making any investment decisions related to these funds.