What Are Hybrid Funds?

Hybrid Mutual Funds Definition, Advantages and Examples

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Hybrid funds are mutual funds or exchange-traded funds (ETFs) that invest in more than one type of investment security, such as stocks and bonds. This makes hybrid funds outstanding for a stand-alone option, good funds for beginners, or core holdings in a complete portfolio of mutual funds.

Hybrid Funds Definition

Also known as Balanced Funds or asset allocation funds, Hybrid Funds are mutual funds that provide a combination of more than one underlying investment asset class, such as stocks, bonds or cash. The "hybrid" descriptor comes from the idea that one mutual fund consists of a mix of different elements typically existing in two or more funds.

Most often, hybrid funds are a combination of stocks and bonds and the fund will have a stated objective, such as aggressive, moderate or conservative. For many investors, it can make sense to buy mutual funds that focus on multiple objectives, asset classes, or security types rather than just one investment type.

At the core of the smartest investment philosophy is diversification. Often the best mutual funds are those that have a diverse blend of holdings and hybrid funds are an excellent example of this category of investment.

Examples of Hybrid Funds

The asset allocation of hybrid funds can remain fixed (i.e balanced funds) or it may change over time (i.e. target-date funds).

Balanced hybrid funds are commonly classified as conservative (low risk), moderate (medium risk) or aggressive (high risk / high return potential). For example a moderate allocation fund would typically have an asset allocation of approximately 65% stocks and 35% bonds. One of the best moderate allocation balanced funds is Fidelity Balanced (FBALX).

Target-date funds, commonly used for retirement saving and investing, work somewhat how their name implies: The investor chooses a target date (a year) that is closest to the end of their investment objective. For example, if the investor thinks they will retire around the year 2040, they could choose a fund like Vanguard Target Retirement 2040 (VFORX). Had the investor first bought shares of VFORX in the year 2015, the asset allocation would have been approximately 90% stocks and 10% bonds. This mix can be considered aggressive but it is appropriate for a time horizon of 25 years. But as the year 2040 draws near, the asset allocation will slowly change to be more bonds and less stocks.

There are several other mutual fund families that offer balanced funds and target date retirement funds. One of the best funds families that offer hybrid funds is T.Rowe Price Mutual Funds. Their target-date funds are highly rated but investors should be aware that they achieve higher long-term performance because their portfolios tend to have higher concentrations of stocks in their allocations.

While greater stock allocation can make for greater performance in the long run, which can be a prudent goal in the early years of retirement saving, the higher relative risk (and lower returns in down markets) may be too volatile for some investors with lower risk tolerance.

Bottom Line on Hybrid Funds

Keep in mind the greatest strength of hybrid funds -- the ability to diversify with just one mutual fund. This is why beginners can use hybrid funds to get started investing. This diversification quality also allows for use as a core holding in a portfolio of mutual funds or ETFs.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.