NISM ASSIGNMENT 2

Name – Alvin George

Roll No- FCM2122001

What Is a Hybrid Fund?

A hybrid fund is an investment fund that is characterized by

diversification among two or more asset classes. These funds
typically invest in a mix of stocks and bonds. They may also be
known as asset allocation funds.

 A hybrid fund is a classification of a mutual fund or ETF

that invests in different types of assets or asset classes to
produce a diversified portfolio.
 Balanced funds, which hold typically 60% stocks and 40%
bonds are a common example of a hybrid fund.
 Blended funds, which mix growth and value stocks, are
another hybrid fund example.

Understanding Hybrid Funds

Hybrid funds offer investors a diversified portfolio. The term

hybrid indicates that the fund strategy includes investment in
multiple asset classes. In general, it can also mean that the
fund uses an alternative mixed management approach.

Hybrid funds are commonly known as asset allocation funds. In

the investment market, asset allocation funds can be used for
many purposes. These funds offer investors an option for
investing in multiple asset classes through a single fund.

Hybrid funds evolved from the implementation of modern

portfolio theory in fund management. These funds can offer
varying levels of risk tolerance ranging from conservative to
moderate and aggressive.
  Balanced funds are also a type of hybrid fund. Balanced
funds often follow a standard asset allocation proportion,
such as 60/40.
 Target date funds or lifecycle funds also fit into the hybrid
category. These funds invest in multiple asset classes for
diversification. Target date funds vary from standard
hybrid funds in that their portfolio portions begin with a
more aggressive allocation and progressively rebalance
to a more conservative allocation for use by a specified
utilization date.
 A blend fund (or blended fund) is a type of equity mutual
fund that includes a mix of both value and growth stocks.
These funds offer investors diversification among these
popular investment styles in a single portfolio.

In all cases, hybrid funds will include some mix of two or more
asset classes. In risk-targeted and balanced funds, allocations
will typically remain at a fixed proportion. In funds targeting a
specified utilization date, the proportion of asset mix will vary
over time. In all of the funds, the investment manager may
actively manage the individual holdings within each asset
category to respond to changing market conditions and
potential capital appreciation opportunities.

Examples of Hybrid Funds

Investment managers offer a wide range of options for hybrid

funds. Below are two examples.

Vanguard Balanced Index Fund (VBIAX)

This fund has a 60/40 balance among stocks and bonds. The
stock portion of the portfolio seeks to replicate the CRSP U.S.
Total Market Index. The bond portion of the portfolio seeks to
replicate the Bloomberg Barclays U.S. Aggregate Float
Adjusted Index. The fund has an expense ratio of 0.06% as of
Q2 2021.
T. Rowe Price Retirement 2060 Fund (TRRLX)
The T. Rowe Price Retirement 2060 Fund is a hybrid target-
date fund. As of May 2021, it had more than 90% of the
portfolio in stocks and approximately 8% in bonds and other
fixed-income securities. The fund uses a fund of funds
approach with 19% of the portfolio in a growth stock fund. The
fund has an expense ratio of 0.71% as of Q2 2021.

Things an Investor Should Consider?

 Risks factor: - It would be wise to assure hybrid funds to

be completely risk-free, any instruments which invest in
equity markets will have some risk, it might be less risky
than pure equity funds, but you need to exercise caution
and portfolio rebalancing regularly.

 Returns: - Hybrid funds don’t offer guaranteed returns.

The performance of underlying securities affects the Net
Asset Value (NAV) of these funds. So, it may fluctuate
due to market movement. Moreover, these might not
declare dividends during market downturns.

 Cost: - Hybrid funds would charge a fee for managing

your portfolio, which is known as the expense’s ratio.
Before investing in a hybrid fund, ensure it has a low
expense ratio than other competing funds, and this
translates into higher take-home returns for the investor.

 Investment Horizon: - Hybrid funds may be ideal for a

medium-term investment horizon, say five years if you
want to earn a risk-free rate of returns, you may go for
arbitrage fund. They bet on price differentials of securities
in different markets.

 Financial Goals: - You can meet intermediate financial

goods like buying a car or funding higher education with
hybrid funds. Retirees too invest in balanced funds and go
for a dividend option to supplement their post-retirement
income
 Tax on Gains: -The equity component of hybrid funds is
taxed like equity funds. Long-term capital gains over Rs 1
lakh on equity component are taxed at the rate of 10%
Short-term capital gains (STCG) on equity component are
taxed at the rate of 15%. The debt component of hybrid
funds is taxable as any other debt fund. You must and
taxed as per your income slab. LTCG from debt
component is indexation and 10% without the benefit of
indexation.