Pamela W. Holloway Hybrid Funds diversify their holdings across many asset categories, including equities and fixed-income instruments. By making investments across a wide range of asset categories, these funds seek to reduce overall portfolio risk.
But how do you choose the best hybrid fund to invest in? Below are some tips for the same.
Performance Against Benchmark
When evaluating the success or failure of a hybrid mutual fund, it is useful to have something to compare it to, such as the index to which it is compared. The benchmark index determines the program’s investment strategy. Therefore, a benchmark index’s asset allocation should correspond to the scheme’s investment goal. For instance, a mutual fund focused on banking equities would use the Bankers’ Acceptance Rate (BAI) as its benchmark index.
Compare Results to Predicted Values for Each Category
Another essential consideration is the mutual fund scheme’s performance relative to its active peer group. This allows you to see the fund’s performance in context. Mutual fund plans of the same kind should be compared exclusively. For this reason, it is only appropriate to compare big-size equity funds with other large-cap equity funds and not with mid-cap or debt funds.
Stability in Results
A solid mutual fund provides stable returns for its investors over time rather than short-term gains. The fund should be able to generate returns easily during market upswings and downturns.
The expertise of the Investment Manager
When choosing a mutual fund, it’s also vital to consider the fund management and how long they’ve been in charge. An investor may do this by considering the manager’s track record with the fund in issue and the track record of any other funds they are presently managing or have managed in the past.
Historical Performance of the AMC
Mutual fund schemes are managed by a corporation called an Asset Management Company (AMC), often sometimes called a fund house. The AMC’s Chief Investment Officer (CIO) makes various high-level decisions. Because the selection is performed at the AMC level, a badly chosen stock may be featured in many schemes held by the same AMC. Therefore, before investing in a mutual fund scheme, it is crucial to research AMC’s performance record.
Assets Managed by the Scheme (AUM)
A mutual fund scheme’s asset under management (AUM) measures its measures. Simply put, it refers to the number of people signed up for the plan. It may be difficult for an equity fund, particularly a small-cap fund, to enter and exit companies if it has substantial assets under management (AUM). However, in the case of liquid and short-term debt funds, a bigger AUM is preferred since it reduces the fund’s sensitivity to redemptions from major investors.
Expense Ratio
A mutual fund’s cost ratio represents the amount paid to the asset management company (AMC) for the fund’s management, marketing, and distribution. This total consists of all costs associated with managing the fund. Capital markets regulator SEBI limits this to 2.25 percent of a fund’s total assets. The cost ratio is lower since no distribution fee is required for direct plans of mutual fund schemes. The smaller a mutual fund’s cost ratio, the greater its net returns.
Conclusion
Before deciding on a fund, you need to analyze its financial aspects thoroughly. The best hybrid fund should be chosen based on several quantitative and qualitative criteria. It would help if you also considered investing in time horizon, risk tolerance, and economic objectives.
