Beginner's Guide to Hybrid Mutual Funds

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Beginner's Guide to Hybrid Mutual Funds

People debating investment strategies
Mutual funds have become extremely popular over the last 20 years. In the United States alone, one half of all households invest in mutual funds making it a $15 trillion market, which is one half of the $30 trillion of mutual fund assets worldwide.
With such a large market, the majority of investors making purchases of mutual funds tend to favor a one-stop shopping approach, and as such, hybrid mutual funds are getting more and more popular among the investing crowd. Between 2006 and 2013 investors have added $384 billion in net new cash and reinvested dividends to these funds.

In 2013, hybrid mutual funds had record inflows of $73 billion (up from $47 billion in 2012) out of a total of $167 billion of investments into mutual funds. That’s nearly half, which showcases the fact that these types of mutual funds are gaining popularity amongst investors. To put it into perspective, as of 2013, hybrid funds had 8% of the $15 trillion U.S. mutual fund market.

Be sure to also take a look Under the Hood of the 10 Biggest Mutual Funds.

What Is a Hybrid Fund?

A hybrid mutual fund, also referred to as asset allocation funds, target-date funds, or balanced funds, are a portfolio made up of a mix of stocks, bonds and cash. Hybrid funds can be broken down into domestic or international hybrid categories and can be more aggressive (higher equity component) or conservative (higher-fixed income component) depending upon the fund’s prospectus.

The fund’s portfolio may be periodically rebalanced to bring the fund’s asset allocation more in line with prospectus objectives. They are created for investors looking for a balance between capital appreciation, safety, and income and hold a broad appeal because they provide a comfortable way of getting exposure to stocks.

What’s the Appeal of Hybrid Funds?

Hybrid funds are safer than equity funds and there are a huge variety of choices suited to different risk appetites. They are cost effective; the average hybrid fund expense ratio is 125 basis points but can vary between 64 basis points upwards to 198 basis points (as of 2013). Comparatively, equity funds have an average MER of 137 basis points, and bond funds have an average of 100 basis points. As seen, they are one of the most cost effective options (lower than equity funds but slightly higher than bond funds).

Be sure to also see the Cheapest Mutual Funds for Every Investment Objective.

Moreover, hybrid funds offer the benefits of both stocks and bonds. Many companies market their funds as complete portfolio solution and have names such as “balanced,” “income,” “growth” and target dates. Because of this, it’s very simple and convenient to gain exposure to both equities and bonds in one investment.

Common Misconceptions and Disadvantages

One consideration with hybrid funds, as with any mutual fund, is paying too much in fees. Some hybrid funds charge more in fees than both bond funds and equity funds. For these funds, the investor is essentially paying a fund company for the privilege of mixing stocks and bonds in a single fund. Just be sure to look at the management expense ratios to be safe to make sure it is cost effective.

Another issue is that there can be too much “auto-pilot.” Fund managers, while professionals, are restricted in their allocations as stated in the fund prospectus. Because of this limitation, they can’t always react quickly to market conditions. For example, if the fund has a higher than average weighting in a stock and that stock has a major drop, it would take time to pull out and invest in a similar security.

Lastly, one size does not fit all. Hybrid funds give the best of both stocks and bonds, but if an investor is overly conservative, or overly aggressive in risk tolerance, a hybrid mutual fund may not be the most ideal investment.

Additional Benefits

Hybrid mutual funds have outperformed bank deposits by a wide margin, considering most savings accounts pay less than 1% interest. They have also outperformed most fixed income investments, with 30-year Treasury bonds hovering around 3% as of October 2014. Diversification is widely known as a great way to invest, and hybrid mutual funds truly live up to that name, being diversified across multiple asset classes and with multiple investments within those asset classes.

Be sure to also see the 10 Biggest Mutual Fund Investing Myths Debunked.

What is often overlooked with hybrid mutual funds is they tend to reduce the temptation of selling losing investments and changing the portfolio to a more new and “hip” investment.

Tax Considerations

As with other kinds of mutual funds, there are often tax consequences with the rebalancing of a portfolio. One way around this is to hold a hybrid mutual fund in a tax-free account such as a 401k. Otherwise, the income received from the fixed income side of the investment is added to the investor’s income and any capital gains arising from the rebalancing of the portfolio will be taxed as well.

Biggest Hybrid Mutual Funds

There are a variety of different kinds of hybrid mutual funds, depending upon an investor’s risk tolerance and if they want more equity or fixed income in their investment. This list is comprised of the top rated funds for long-term investors based on the ratings of leading fund industry researchers with the breakdowns of what investment split they have:
  • Aggressive Allocation: LKCM Balanced Fund (LKBAX)
    Approximately 70% in stocks; 26% in bonds; rest cash
  • Conservative Allocation: USAA Growth and Tax Strategy Portfolio (USBLX)
    Approximately 47% stocks; 52% in bonds
  • Moderate Allocation: Bruce Fund (BRUFX)
    Approximately 46% stocks; 17% bonds; 13% convertible; 3% preferred; rest cash
  • Retirement Income: TIAA-CREF Lifecycle Retirement Income Fund (TLRIX)
    Approximately 26% stocks; 45% bonds; 9% foreign bonds; 13% foreign stocks; rest cash
  • World Allocation: Morgan Stanley Institutional Global Strategist Portfolio (MBAAX)
    Approximately 23% stocks; 10% bonds; 71% foreign bonds; 48% foreign stocks; rest cash

The Bottom Line

Hybrid mutual funds can be a good investment and there are many different kinds for investors to choose from. They have the best of both worlds: the advantages of investing in equities while gaining the benefits of a fixed income investment. Before any investment decision, be sure to look at the fund’s prospectus to see if it aligns with your investment goals, and lastly, pay attention to the management expense ratio – the lower the better. With so many different kinds of investments, hybrid mutual funds have the simplicity and cost efficiency lacking in some other investment types.

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Popular Articles

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Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

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Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

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Find out why $30 trillon is invested in mutual funds.


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People debating investment strategies

Beginner's Guide to Hybrid Mutual Funds

Mutual funds have become extremely popular over the last 20 years. In the United States alone, one half of all households invest in mutual funds making it a $15 trillion market, which is one half of the $30 trillion of mutual fund assets worldwide.
With such a large market, the majority of investors making purchases of mutual funds tend to favor a one-stop shopping approach, and as such, hybrid mutual funds are getting more and more popular among the investing crowd. Between 2006 and 2013 investors have added $384 billion in net new cash and reinvested dividends to these funds.

In 2013, hybrid mutual funds had record inflows of $73 billion (up from $47 billion in 2012) out of a total of $167 billion of investments into mutual funds. That’s nearly half, which showcases the fact that these types of mutual funds are gaining popularity amongst investors. To put it into perspective, as of 2013, hybrid funds had 8% of the $15 trillion U.S. mutual fund market.

Be sure to also take a look Under the Hood of the 10 Biggest Mutual Funds.

What Is a Hybrid Fund?

A hybrid mutual fund, also referred to as asset allocation funds, target-date funds, or balanced funds, are a portfolio made up of a mix of stocks, bonds and cash. Hybrid funds can be broken down into domestic or international hybrid categories and can be more aggressive (higher equity component) or conservative (higher-fixed income component) depending upon the fund’s prospectus.

The fund’s portfolio may be periodically rebalanced to bring the fund’s asset allocation more in line with prospectus objectives. They are created for investors looking for a balance between capital appreciation, safety, and income and hold a broad appeal because they provide a comfortable way of getting exposure to stocks.

What’s the Appeal of Hybrid Funds?

Hybrid funds are safer than equity funds and there are a huge variety of choices suited to different risk appetites. They are cost effective; the average hybrid fund expense ratio is 125 basis points but can vary between 64 basis points upwards to 198 basis points (as of 2013). Comparatively, equity funds have an average MER of 137 basis points, and bond funds have an average of 100 basis points. As seen, they are one of the most cost effective options (lower than equity funds but slightly higher than bond funds).

Be sure to also see the Cheapest Mutual Funds for Every Investment Objective.

Moreover, hybrid funds offer the benefits of both stocks and bonds. Many companies market their funds as complete portfolio solution and have names such as “balanced,” “income,” “growth” and target dates. Because of this, it’s very simple and convenient to gain exposure to both equities and bonds in one investment.

Common Misconceptions and Disadvantages

One consideration with hybrid funds, as with any mutual fund, is paying too much in fees. Some hybrid funds charge more in fees than both bond funds and equity funds. For these funds, the investor is essentially paying a fund company for the privilege of mixing stocks and bonds in a single fund. Just be sure to look at the management expense ratios to be safe to make sure it is cost effective.

Another issue is that there can be too much “auto-pilot.” Fund managers, while professionals, are restricted in their allocations as stated in the fund prospectus. Because of this limitation, they can’t always react quickly to market conditions. For example, if the fund has a higher than average weighting in a stock and that stock has a major drop, it would take time to pull out and invest in a similar security.

Lastly, one size does not fit all. Hybrid funds give the best of both stocks and bonds, but if an investor is overly conservative, or overly aggressive in risk tolerance, a hybrid mutual fund may not be the most ideal investment.

Additional Benefits

Hybrid mutual funds have outperformed bank deposits by a wide margin, considering most savings accounts pay less than 1% interest. They have also outperformed most fixed income investments, with 30-year Treasury bonds hovering around 3% as of October 2014. Diversification is widely known as a great way to invest, and hybrid mutual funds truly live up to that name, being diversified across multiple asset classes and with multiple investments within those asset classes.

Be sure to also see the 10 Biggest Mutual Fund Investing Myths Debunked.

What is often overlooked with hybrid mutual funds is they tend to reduce the temptation of selling losing investments and changing the portfolio to a more new and “hip” investment.

Tax Considerations

As with other kinds of mutual funds, there are often tax consequences with the rebalancing of a portfolio. One way around this is to hold a hybrid mutual fund in a tax-free account such as a 401k. Otherwise, the income received from the fixed income side of the investment is added to the investor’s income and any capital gains arising from the rebalancing of the portfolio will be taxed as well.

Biggest Hybrid Mutual Funds

There are a variety of different kinds of hybrid mutual funds, depending upon an investor’s risk tolerance and if they want more equity or fixed income in their investment. This list is comprised of the top rated funds for long-term investors based on the ratings of leading fund industry researchers with the breakdowns of what investment split they have:
  • Aggressive Allocation: LKCM Balanced Fund (LKBAX)
    Approximately 70% in stocks; 26% in bonds; rest cash
  • Conservative Allocation: USAA Growth and Tax Strategy Portfolio (USBLX)
    Approximately 47% stocks; 52% in bonds
  • Moderate Allocation: Bruce Fund (BRUFX)
    Approximately 46% stocks; 17% bonds; 13% convertible; 3% preferred; rest cash
  • Retirement Income: TIAA-CREF Lifecycle Retirement Income Fund (TLRIX)
    Approximately 26% stocks; 45% bonds; 9% foreign bonds; 13% foreign stocks; rest cash
  • World Allocation: Morgan Stanley Institutional Global Strategist Portfolio (MBAAX)
    Approximately 23% stocks; 10% bonds; 71% foreign bonds; 48% foreign stocks; rest cash

The Bottom Line

Hybrid mutual funds can be a good investment and there are many different kinds for investors to choose from. They have the best of both worlds: the advantages of investing in equities while gaining the benefits of a fixed income investment. Before any investment decision, be sure to look at the fund’s prospectus to see if it aligns with your investment goals, and lastly, pay attention to the management expense ratio – the lower the better. With so many different kinds of investments, hybrid mutual funds have the simplicity and cost efficiency lacking in some other investment types.

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next