Why do Some Investors Prefer Hybrid Funds Over Equity?
Some investors invest money based on market sentiment.
For example, they look for periods when equity is doing well or the debt has a bright prospect. As a result, they lose out on capital appreciation. To make money, you need to invest at a low price and sell at a high price. You probably know this concept. However, the reality is different and is unlikely to change anytime soon.
Many investors prefer hybrid funds over other categories simply because they invest in equity and debt, which moderates the risk.
Keeping this in mind, in this article, we seek to discuss hybrid funds vs equity and analyze which is better for you.
Understanding Equity Funds
As the name suggests, these mutual funds invest most of their corpus in equity and equity-related instruments. Since they invest in equities, they tend to have the highest risk among mutual funds.
When Are Equity Funds Suitable?
Assume you are 23 years old and plan to save for your retirement, which is due 35 years from now. Given that your horizon is long-term, you should opt for pure equity funds. A SIP of Rs. 2500 monthly for 35 years in a small-cap equity fund would fetch you Rs 3.71 crore.
Understanding Hybrid Funds
Hybrid funds invest in both debt and equity instruments. The debt component limits the risk, while the equity component creates wealth. These funds are a good investment when you believe the interest rate will decrease while the equity market increases.
Hybrid funds are of two types- Debt Oriented, also known as Monthly Income Plans (MIPs), and Equity Oriented Funds.
When Are Hybrid Funds Suitable?
Assume you are 25 years old, and you plan to purchase a car in 5 years that is worth Rs 4,00,000, and you can save a maximum of Rs 5,000 per month. In this case, you can invest in balanced funds, so your investment is not exposed to high risk and volatility.
While the equity component provides returns and capital appreciation when the equity market rises, the debt component safeguards your risk by constraining the downward movement.
Now comes the main question, which is better - equity funds vs hybrid funds?
Well, there is no direct answer as it depends on multiple factors such as your objective, investment horizon, and risk appetite, among other things.
Why Are Hybrid Funds Preferred Over Equity Funds?
Many investors prefer hybrid funds to other forms of mutual funds. This is because hybrid funds participate in equity and debt to mitigate risk. In addition, this method is consistent with the actual investment theory we are familiar with, diversifying your investment to balance the risks involved and capitalize on market volatility.
In addition, these funds provide higher returns when compared to debt funds.
So, naturally, a hybrid fund is a favourite instrument for a conservative investor who doesn't want to get exposed to equity completely.
In Conclusion
To conclude about hybrid funds vs equity funds , there is no right or wrong regarding the investment instrument. It depends on your investment objective, investment horizon, risk appetite, age, and many more factors.
If you want to know more about mutual fund investments, don't hesitate to contact us. Likewise, if you have any queries about your risk appetite, please drop in, and we shall be glad to respond.
Until then,
Happy investing!