Do Hybrid Funds Provide a Valuable Mix?

When investing in mutual funds, one of the things you might be looking at is something called a ‘hybrid fund.’ Although hybrid funds are a type of mutual fund, they are different in terms of the underlying assets within the fund. Mutual funds can have portfolios comprised of investment products within one sector of the market. Hybrid funds, on the other hand, contain assets that span across several sectors. For instance, hybrid funds may be comprised of stocks, bonds and other commodities. Is there any benefit to this and do hybrid funds provide a valuable mix? Actually, there are quite a few advantages inherent in hybrid funds.

The Advantages of Diversification
Perhaps the greatest advantage of a hybrid fund over a traditional mutual fund is the fact that there are a number of assets within the portfolio covering a broad array of investment products. Because of this, if one sector is on a downward spiral another sector may be skyrocketing. Diversification can always mitigate a great deal of risk when investing because, to borrow an old cliché, you are not putting all your eggs into one basket.

Types of Hybrid Funds
While a hybrid fund, by its very definition, is comprised of a broad array of investment products, there are actually quite a number of hybrid fund strategies to choose from. Some of the major types of hybrid funds include balanced funds, asset allocation funds and life cycle funds. If you are interested in a hybrid mutual fund then you should try to understand the choices available before choosing which fund you would like to invest in.

Balanced Hybrid Funds
Balanced funds contain predetermined proportions of assets. For example, a balanced fund might be set up to include 45% stocks and 55% bonds. At any given point, even though the underlying assets in the portfolio will change, the proportion will remain constant. It is apparent that a balanced fund does provide the diversification inherent in a hybrid fund but the diversification in the actual underlying assets is always held close to a set ratio.

Hybrid Asset Allocation Funds
It has been said that a mutual fund is only as good as the fund manager since he or she will be managing the investment products in the fund portfolio. This is especially true of a hybrid asset allocation fund because the manager is responsible for gauging market movement to determine where best to invest the fund’s resources. Sometimes the majority of assets will be in stocks while other times the majority of assets will be in bonds. In other words, an asset allocation fund has investments chosen by the fund manager based on his or her analysis or market trends.

Retirement Accounts and Life Cycle Funds
In recent years life cycle hybrid funds have become extremely popular in tandem with retirement accounts. This is an innovative concept in hybrid funds because as the investors get closer to the age of retirement the assets within the funds will change accordingly. Usually, the fund will ‘mellow out’ to some extent and the approach to the fund will move from aggressive to passive thereby mitigating some of the risk which no one wants to face that close to retirement!

If you are not a ‘risky’ investor then it shouldn’t be necessary to ask, “Do hybrid funds provide a valuable mix?” Of course the answer is going to be in the affirmative because of the safety margin involved. However, if you are an investor who is willing to take a great deal of risk in order to realize higher yields, then perhaps not. Hybrid funds, by their very nature, tend to be the safest type of mutual funds because they are usually highly diversified.

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