How long should one remain invested in a hybrid fund?

Hybrid funds are one of the mutual fund categories that are drawing the attention of several Indian investors for all the right reasons. Mutual funds are an investment vehicle for pooling funds from investors sharing a common investment objective. The fund house invests this pool of funds collectively on behalf of retail investments depending on the nature of the scheme, the money is invested across multiple asset classes like equity and debt. Actively managed mutual funds involve active participation of the fund manager whose duty is to buy/sell securities in such a way that the scheme achieves its investment objective. Hybrid funds are actively managed mutual funds that invest in both equity and debt securities. Because these funds carry such a unique portfolio, they are also referred to as balanced funds. Investors who lack in-depth financial knowledge about mutual funds or financial planning can too consider investing in hybrid funds. That’s because these funds provide active risk management, thus making sure that the investor’s portfolio doesn’t face losses even in volatile market conditions. The equity part of a hybrid fund gives it an opportunity to earn some profits at the same time, the debt element aims at balancing the overall risk.

How long should one remain invested in hybrid funds?

Whether you should invest in hybrid funds will totally depend on your risk appetite, investment horizon and financial goals. If you are someone who is completely risk averse, then you should reconsider investing in any type of mutual funds. Mutual funds do not offer guaranteed returns, but they do hold the potential to offer better returns as compared to conservative schemes. That’s because unlike conservative schemes, mutual fund portfolios are rebalanced daily through active fund management. Hence, unless there are some really misfortunate events like the current coronavirus pandemic or the 2008 stock market crash, chances of a hybrid fund underperforming are rare.

However, if you are keen on investing in hybrid funds, it is better that you have a medium to long term investment horizon and invest in these funds for at least five years. The longer you remain invested, the more chance you have of earning better capital gains. Also when you keep a long term investment horizon your investments can multiple, thanks to the power of compounding. In the mutual fund world compounding refers to the interest earned on the interest or profits earned on the profits from your investments.

So if you want to witness your small investment turn into wealthy corpus, then you may need to keep investing in a hybrid fund for at least 5 years. There are other benefits for long term investments too. For example, those with a short term horizon may have to tackle inflation. Their finances can get hurt due to inflation. However, it is believed that long term investments hold the power to beat inflation too. Also, if you invest in a hybrid fund for the long run, you do not have to worry about the daily market vagaries. Eventually the market’s ups/downs will neutralize and those with a long term investment horizon may not have to worry about the market’s volatile nature.

Investing in hybrid funds may help investors fetch some capital gains in future. However, investors should bear in mind that investments made in mutual funds are subject to market risks and returns from these investments are never guaranteed. Hence, investors are expected to determine their risk appetite before investing in a hybrid fund. Whether a hybrid will invest more in equity or debt might totally depend on the investment objective of the fund. Hence, investors are expected to do thorough research before taking the final investment call.

Mutual fund investments are subject to market risk, read all scheme related information carefully.