Hybrid fund – What is it, definition and concept

A hybrid fund, within the types of existing investment funds, stands out in particular because the acquisition of the instruments that make it up pursues the objective of diversification.

In other words, a hybrid fund is a type of fund dedicated to investing in several financial assets simultaneously. Its main purpose is diversification, which is to invest, at the same time, in instruments with different characteristics.

Throughout the fund’s experience, its composition may vary in response to market drift or the economic situation.

A hybrid fund has the ability to adapt to financial changes and take advantage of investment opportunities that may arise.

On the other hand, in economic and financial language it is also frequent to refer to this concept as an asset allocation fund, responding to its nature.

Nature of a hybrid background

In a basic scheme, hybrid-type funds consist of the composition of a certain financial instrument by means of more than two classes of different financial assets.

In this line, the most usual or common option is to combine instruments such as a share with a bond.

The objective of this formation is the diversification of the portfolios of the investors who acquire these distinctive titles.

Although this possibility is widespread in the market, currently the most important international hybrid funds are the Vanguard Balanced Index (VBINX) and the T. Rowe Price Retirement Fund 2060 (TRRLX).

Characteristics of a hybrid fund

Compared to other investment alternatives present in the day-to-day market, hybrid funds have certain distinctive characteristics:

  • Diversification: As already noted, hybrid funds seek to ensure that their participating investors benefit from a varied portfolio.
  • Personalization: The configuration of different investment products facilitates the customization of the choice or according to the preferences of the investors.
  • Balance: The configuration of each fund establishes balance ratios depending on the proportions of the assets that comprise it. A 60/40 value is considered balanced, while an 80/20 is far from such status.
  • Risk aversion: Combining assets of a diverse nature helps reduce risk levels for a portfolio. In that sense, the greater the balance, the lower the risk.
  • Variable configuration: Over time, the fund manager has the ability to vary the composition of the fund as he sees fit or at the request of his investors.
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Hybrid fund and asset allocation

Taking the above into account, in financial jargon it is possible to find the hybrid fund categorization also for a situation of mixed asset management.

In other words, the investment practice encompasses various investment possibilities through the use of a single fund aimed at a large number of products. These products, in turn, are not specific to a single instrument or area of ​​investment (energy, telecommunications, textiles…).

In the same way, this modality facilitates the reduction of risks when investing, since, at a lower concentration or identification of assets, a better investment risk ratio is obtained.

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