Every investor follows a different investment strategy; some take contrarian bets, while others go with the flow and invest based on the sentiments of the market. Take, for instance, the case of the latter. Such investors will patiently wait for trends when equity stocks are on an upward trajectory or debt funds promise more short-term gains.

However, in pursuing such trends, these investors miss out on the opportunity for capital appreciation. They forget the principle that to make money in the long run, you will have to buy at prices that are low and sell when the markets reach new highs. Yet, in practice, this is often more challenging than it appears, and it’s unlikely to change in the near future.

Many investors opt for hybrid funds instead of other investment categories, as these funds balance investments in both equity and debt, helping to manage risk more effectively.

In this article, we will understand why some investors prefer hybrid funds over equity.

• Hybrid funds offer a mix of equity and debt investments, which helps moderate risk while still providing the potential for capital appreciation. This makes them attractive for investors who want to avoid high volatility while aiming for growth.
• The decision to invest in hybrid or equity funds depends on individual factors like financial goals, risk tolerance, investment horizon, and personal circumstances. There's no universal answer, and investors should choose based on their unique needs.

Before we understand why some investors prefer hybrid funds over equity, let us look at what equity funds are.

Equity funds, as the name suggests, are mutual funds that allocate almost all their capital in equity schemes or equity-linked financial instruments. Since equity funds are the most susceptible to market movements and fluctuations, these funds carry the highest risk among the different categories of mutual funds.

Whether an equity fund is right depends on your investment goal and time horizon. Take, for example, you are 24 years old and want to start saving for your retirement and have more than 30 years. Since your horizon is long-term, you can take the risk of investing in purely equity funds. A monthly SIP of Rs. 3,000 for 30 years in a small-cap equity fund can give you a corpus of more than Rs. 3.5 crores.

Hybrid funds, on the other hand, invest in a mix of debt and equity instruments. The debt portion of the hybrid fund is for reducing risk and providing security, while the equity portion aims for growth and wealth creation. Hybrid funds are generally opted by investors when they believe that the interest rates will decrease while the equity market values will increase.

Hybrid funds can be further divided into two categories: Debt-oriented funds and equity-oriented funds.

In order to understand why some investors prefer hybrid funds over equity, let us look at an example. A 25-year-old wants to purchase a car worth Rs. 5 lakhs. This person can save up to Rs. 5,000 every month for this goal, and hence, decides to invest in a hybrid fund to safeguard his investment by not exposing it to higher levels of volatility, fluctuations, and risk.

The equity component of the balanced fund gives the investor an opportunity for capital appreciation if the equity market rises. At the same time, the debt component acts as a fail-safe by mitigating risk and protecting the capital against any market crashes or downward movements.

So, now that we know why some investors prefer hybrid funds over equity, the next question is: which one of these fund types is better—equity or hybrid? This question does not have a direct ‘yes’ or ‘no’ answer. This is because any type of investment depends on multiple factors, such as your financial ambitions, investment goals, risk tolerance, time horizon, and multiple other aspects.

The reason why some investors prefer hybrid funds over equity or other mutual fund categories is because hybrid funds strike a good balance between growth and mitigating risk. Hybrid funds follow the tried and tested investment approach of diversification to balance out any risks and use market volatility to your advantage.

Along with safeguarding capital, these funds also provide higher returns than debt funds. Hence, conservative or risk-averse investors naturally opt for hybrid funds, as they do not want over-exposure to equity.

Whether you opt for an equity, debt, or hybrid fund, always remember there is no right or wrong answer. It all depends on your unique situation, financial objectives, investment timelines, age, risk tolerance, and multiple other factors.