Equity, Debt or Hybrid: Which Mutual Fund Fits Your Financial Goals?

Mutual Fund Investment: Investors have the flexibility to choose from various investment products and categories according to personal preferences; however, it is essential to understand the risks involved while investing in any financial product. The choice should be guided by the individual’s financial goals and risk tolerance.

The assessment of investment product compatibility for defined financial targets should be conducted together with procedures that assess risk levels. The success of investment strategies aimed at specific goals increases when investment products align with time-frames as well as expected returns and liquidity requirements.

Choosing Between Equity, Debt, And Hybrid

The very fact that we have these options tells us something important. You can align your investments with your specific purpose and financial goals.

“Equity mutual funds represent a suitable investment option for investors who maintain long-term financial goals alongside strong risk tolerance. The benefits of compounding increase the longer you stay invested. Investors, however, need to understand that they must remain invested during both stable and turbulent market periods. Market volatility demands that investors must maintain their investments through these periods,” says Gibin John, Senior Investment Strategist, Geojit Investments Limited.

Also, if your financial goals are short-term, i.e., less than 3 years, you may consider investing in debt category instruments. This category is also suitable for parking accumulated funds that are allocated for a specific goal.

Financial experts say equity can be volatile and unpredictable in the short term. But over the long term, equities tend to offer significantly better returns and are possibly the only asset class that can consistently beat inflation. For those, however, who do not prefer the rollercoaster ride of equity markets, there is always the relatively stable option of fixed income.

“Over the last decade or so, we have also seen the strong emergence of hybrid funds, which combine both equity and debt. It is quite intuitive. Equity brings volatility but higher growth potential, while debt offers stability. A blend of the two gives you not only better returns, but also a smoother investment experience and more balanced expectations,” says Santosh Joseph, CEO, Germinate Investor Services.

When your return, experience and outcomes improve, that is when an investment truly starts to work for you. That is why choosing between equity and fixed income is not a binary decision. You can do both and benefit from both.

“Equity funds serve best during investment accumulation, yet transitioning toward debt funds becomes necessary to shield your portfolio from market fluctuations as you reach your target date,” says John.

If we go back in time and look at the work of Harry Markowitz, the Nobel Prize winning economist behind the Modern Portfolio Theory, he explained it quite simply. Having more than one or two assets in a portfolio, which we call diversification and asset allocation, helps minimize risk and optimize returns.

“Equity is a great asset class. Fixed income is a great asset class. But a hybrid approach, combining the two, can help you ride out volatility, manage risk and still optimize your returns and return expectations. when you are setting your financial goals, you have the flexibility to choose the equity route, the debt route, or for those who have time, prefer lower volatility but still want the long-term upside of equity returns, hybrid funds may be a very effective solution,” suggests Joseph.

In the short term, they help you mitigate risks and downturns, and in the long term, they allow you to participate in the equity market, which has historically rewarded patient investors.