SEBI proposes passive hybrid funds: What are they?

You would have heard of PASSIVE funds and HYBRID funds separately. But now, SEBI proposes Passive Hybrid Funds. If this sounds interesting, invest your time in this article to learn about a new investment opportunity that may be knocking at your door soon. But before we look at passive hybrid funds, we want to ensure you understand these two investment options - Passive and Hybrid Funds.

What are Passive Funds?

Passive funds, also known as index funds, are a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific market index. These funds aim to provide broad market exposure, low operating expenses, and simplicity in terms of investment strategy. Unlike active funds, which rely on fund managers to make investment decisions, passive funds follow a predetermined set of rules or benchmarks.

Passive funds aim to replicate the performance of a specific index, such as the Nifty 50 or Sensex. The fund's portfolio includes the same securities in the same proportions as the index it tracks.

What are Hybrid Funds?

For a complete portfolio, you need different asset classes in your portfolio. One way is to find a fund for each, and the other is to invest in hybrid funds.

Hybrid funds are a type of mutual fund that invests in a mix of asset classes, typically combining equities (stocks), fixed income (bonds), and other securities (gold, etc). The hybrid fund goal is to provide you with the benefits of diversification within a single investment vehicle. By holding a variety of asset types, these funds aim to balance risk and return, making them suitable for investors with different risk tolerances and investment objectives. By investing in both equities and fixed income, hybrid funds aim to balance the higher growth potential of stocks with the stability of bonds.

SEBI's proposal for passive hybrid funds

Understanding passive hybrid funds will be easy, as you know the above two terms. SEBI's proposal is to introduce passive hybrid funds that would combine the features of passive and hybrid investing. These funds would track a composite index consisting of a predetermined mix of equity (stocks) and debt (bonds) instruments. The specific weightings of equity and debt in the index would determine the overall risk profile of the passive hybrid fund.

The SEBI has proposed three types of passive hybrid funds:

• Debt-Oriented Passive Hybrid Funds: As the name suggests, these would invest a majority (around 75%) in debt instruments and a smaller portion (around 25%) in equity.
• Balanced Passive Hybrid Funds: These would have a more equal allocation, with roughly 50% invested in equity and 50% in debt.
• Equity-Oriented Passive Hybrid Funds: These would invest a larger portion (around 75%) in equity and a smaller portion (around 25%) in debt.

Before you go

Passive hybrid funds, if implemented as proposed, could offer a new option for investors seeking a diversified and potentially lower-cost way to invest in a combination of equity and debt instruments. However, you should carefully consider your investment goals, risk tolerance, and the specific features of the fund before making any investment decisions.