Hybrid Funds diversify their holdings across many asset categories, including both equities and fixed-income instruments. These funds seek to reduce overall portfolio risk by making investments across a wide range of asset categories.
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 investment strategy of the program is determined by the benchmark index. Therefore, a benchmark index’s asset allocation should correspond to the scheme’s investment goal. For instance, a mutual fund that is focused on banking equities would do well to use the Bankers’ Acceptance Rate (BAI) as its benchmark index.
Compare Results to Predicted Values for Each Category
The mutual fund scheme’s performance relative to its active peer group is another essential consideration. 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 is one that provides stable returns for its investors over time as opposed to short-term gains. The fund should be able to generate returns during market upswings and downturns with equal ease.
The expertise of the Investment Manager
When choosing a mutual fund, it’s also vital to think about 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, as well as the track record of any other funds he or she is presently managing or has 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) is responsible for making a variety of 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)
The asset under management (AUM) of a mutual fund scheme is a measure of its financial success. Simply put, it refers to the total number of people who have 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 a substantial amount of 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.
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. Since no distribution fee is required for direct plans of mutual fund schemes, the cost ratio is lower. The smaller a mutual fund’s cost ratio, the greater its net returns.
You need to do a thorough analysis of the fund from a number of angles before deciding on it. You can choose the best hybrid fund for you based on a number of quantitative and qualitative criteria. You should also consider your investing time horizon, risk tolerance, and financial objectives.