Having a financial goal is essential for every individual because it gives us an opportunity to identify our dreams and goals. Understanding your short term and long term goals is the first step towards effective financial planning. This also helps an individual spread or allocate his or her investments across a wide number of schemes, thus giving them an opportunity to diversify their portfolio and balance risk. When it comes to non-traditional investing methods, talking about risk is important because every investment has some kind of risk associated with it. Especially investments in stocks or avenues like mutual funds have high risk rewards ratio and hence, a lot of investors are turning to them for earning long term capital gains.
If you do not have much knowledge about stocks yet still seek capital appreciation through equity instruments, you may consider investing in mutual funds instead. These are professionally managed funds that invest in stocks and other marketable securities like debt, corporate bonds, call money, treasury bill, commercial papers, G-sec, etc. Fund houses collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. The performance of a mutual fund gravely depends on the performance of its underlying assets in their respective sectors and industries.
Mutual fund schemes are classified as equity, debt, solution oriented and hybrid schemes. Equity mutual funds invest predominantly in equity and equity related instruments. Debt mutual funds allocate a major chunk of their asset in fixed income securities like call money, G-sec, commercial papers, etc. While solution oriented mutual funds are usually goal based like funds for retirement or for planning your child’s future, it is the hybrid that has managed to find the right balance between debt and equity.
Today we are going to lay emphasis on hybrid funds and how you can use them for short, medium and long term goals.
What are hybrid funds?
Hybrid mutual funds avoid the concentration of risk since these funds invest in both equity and debt related instruments. These funds are considered to be ideal for those who do not wish to give their finances a complete exposure to equities and want to balance risk by investing partially in debt as well.
How a hybrid fund can fulfil short, medium and long term financial goals?
By now you know that hybrid schemes invest in debt and equity both. And it is this aggressive investment strategy that allows them to reap higher benefits, sometimes as high as those given by equity mutual funds.
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. Although they invest in debt, hybrid schemes follow an aggressive investment strategy to meet the fund’s investment objective. This makes them a high risk invest too but still not as risky as equity mutual funds. And it is because of this reason that if you want you may remain invested in hybrid funds till you meet your investment objective – be it small, mid, or long term goal.
Hybrid funds can be an ideal choice for someone who is new to mutual funds and do want to take higher risks, yet seeks capital appreciation through partial equity investments. But it is always better to know your goal, risk appetite and investment horizon before investing in any mutual funds. Always align your investments according to your goal and if you are completely new and do not possess adequate investment knowledge, it is better to consult a mutual fund advisor.