For many investors, foraying into the journey of investments and gauging the right mix of investment classes can be akin to finding the right ratio of ingredients for baking the perfect cake. An extra teaspoon of sugar and a missed dollop or two of cream and the spongy, moist cake that you had in mind can be reduced to a gooey mess. Mistakes in figuring the right weightage of different asset classes can have similar impacts on your portfolio.

Financial experts have always advised investors to maintain a diversified portfolio with investments spread across varying asset classes and securities. Diversification ensures that your portfolio’s risk does not get concentrated because of lopsided asset allocation. However, finding the right diversification formula that aligns with your risk appetites and your goals can be a tad complicated. It is common for investors, especially those new to the game to end up over-diversifying their portfolio while many struggles with looking beyond their preferred asset classes.

This is where hybrid funds can come into the picture – these are a category of mutual funds that have a debt component and an equity component in a specific ratio. These funds provide diversification and can act as a cushion against risks associated with investment instruments by investing in two or more asset classes.

Investments in pure equities carry high risks and an equity-heavy portfolio may not be suitable for all investors. In a country that has nursed predilections for investing in safe, traditional investment classes, it is common for many in the investor community to view equities with a pinch of cynicism.

What also adds a layer of complexity for retail investors when it comes to equity investments is that timing the market is next to impossible. This is because many people tend to overlook the fact that timing the market only works when you make entries and exits at the right time – if your timing goes awry in either of the cases, chances are you will be incurring losses.

Also, given that equities generate the best returns in the long run and are better suited for long term investments, equity investments cannot be relied upon for meeting short-term goals. Effects of market volatility can be very pronounced in the short term and there is a possibility that when it is time for you to withdraw your investment, the markets may be experiencing a bloodbath.

Investments in debt instruments are used to fill this gap. While these investments do not generate returns to the tune of equities but they are essential for keeping your portfolio grounded and mitigating the overall risk factor. Debt allocation ensures that your money is safe and that your losses do not skyrocket when equities or other investment classes are performing badly.

However, leaning heavily on debt securities is also detrimental for your financial health, experts say. This is because debt instruments fare well as safe investment havens but they may not generate high returns in the long run. And when inflation is factored in, the returns shrink even more and this can dampen your wealth creation objectives.

Hybrid funds help you strike a balance in terms of risks and returns – the equity exposure facilitates capital appreciation while the debt allocation keeps the risk within tolerable limits. This ensures that you have adequate diversification, your investment can generate inflation beating returns and you do not have to take more risks than what you are comfortable with as an investor. There are multiple variants of hybrid funds that cater to varying risk profiles and you can choose one that fits well with your investment strategy. The fund managers rebalance the portfolio as and when required to maintain the investor’s specified asset allocation. This saves you from the trouble of having to actively track your investment performances and manage them.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.