Hence hybrid mutual funds are popular with investors who like to invest in equities and debt.
Hybrid funds and balanced advantage funds (BAFs) both invest in different asset classes but they have very different investment objectives and risk levels.
What are hybrid funds
Hybrid funds are equity and debt-oriented. The mix of funds depends on the hybrid fund. An aggressive hybrid fund is more exposed to equities and a conservative hybrid fund is more debt-oriented.
The key is that the fund has an asset allocation strategy. Therefore hybrid funds are suitable for investors who want diversification within a single mutual fund.
What are balanced advantage funds
Balanced advantage funds are a type of dynamic asset allocation fund. Unlike hybrid funds, these schemes can change their equity and debt exposure depending on market conditions and the fund manager’s strategy.
When markets are expensive and valuations are less attractive the fund may reduce its equity exposure. When valuations are more attractive the fund may increase its equity exposure. Some BAFs also employ derivatives and valuation-based models in order to manage their effective equity exposure.
Hybrid funds versus Balanced Advantage funds
The biggest difference is the flexibility of asset allocation. Traditional hybrid funds are generally in a relatively fixed equity-debt range and balanced advantage funds have more flexibility in the asset classes.
Hence hybrid funds are easier to understand for investors who prefer more predictable allocations. BAFs could also have potential for professional management of changing market conditions.
Risk can also vary. A hybrid fund with a high equity allocation could see larger short-term fluctuations, whereas a conservative hybrid fund may carry comparatively lower equity risk. BAFs can also be volatile as the equity allocation may change with the strategy adopted by the fund.
What is the one you would like to go for
The decision is based on your investment horizon, risk-based approach and time horizon.
Hybrid funds might be good for investors who like a relatively simple mix of equity and debt and want diversification.
Balanced advantage funds might be suitable for investors who want a fund manager or model to dynamically adjust asset allocation according to market conditions.
But investors should not just choose a fund because it reads “balanced” or “advantage” in a fund.
Different schemes have very different strategies. Investors should look at the scheme's portfolio, asset-allocation strategy, expense ratio, investment objective, past performance and risk factors before investing.
The Bottom Line
Hybrid funds and balanced advantage funds can be part of a diversified portfolio but they do not have to be interchangeable.
Hybrid funds are more well-defined in asset allocation, in contrast to balanced advantage funds which are more flexible so that the balance of assets between equity and debt is more flexible.
Before you invest you need to understand your financial horizon, your investment horizon and your tolerance to fluctuations in the market.
And you need to look for a fund within a risk profile (not just a fund that matches its portfolio with the highest recent returns) that is more than hitting the top performers in the category with the highest returns.
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