Rebalancing criteria for hybrid funds

Hybrid funds offer a blend of stocks and bonds, providing investors with exposure to both asset classes. This can be a great way to diversify your portfolio and potentially reduce risk. However, like any investment, hybrid funds require careful management to maximize returns. This article explains how to master the art of rebalancing to optimize the performance of your hybrid fund portfolio.

What are hybrid funds?

Balanced funds, also known as hybrid funds, are mutual funds that invest in a combination of stocks and bonds. These funds’ goal is to offer investors a diversified portfolio that includes both asset classes. Hybrid funds can be actively or passively managed, and their allocations to stocks and bonds can vary depending on their investment objective. Some hybrid funds prioritise income generation, while others prioritise capital appreciation.

One benefit of hybrid funds is that they can serve as a one-stop shop for investors seeking exposure to both stocks and bonds. This can be especially appealing to investors who are new to investing or lack the time or expertise to manage a portfolio of individual securities. Hybrid funds can also be a good option for investors looking to diversify their holdings and reduce risk.

Recognising the significance of rebalancing

While hybrid funds can be a great investment option, careful management is required to maximise returns. Rebalancing is a critical aspect of managing a hybrid fund portfolio. Rebalancing is the process of adjusting your portfolio’s allocations to maintain your desired asset allocation. This is significant because your investments will grow at different rates over time, causing your portfolio to become unbalanced.

Assume you have a hybrid fund portfolio with a 60/40 allocation to stocks and bonds, respectively. Over a year, your stock investments perform well and grow to account for 70% of your portfolio, while your bond investments remain at 30%. This means your portfolio is now unbalanced and riskier, as you have more stock exposure than you intended. Rebalancing your portfolio will return your allocation to the desired 60/40 split and reduce your risk.

The process of rebalancing hybrid funds

Now that you understand the significance of rebalancing and how frequently it should be done, let’s look at the actual rebalancing process for hybrid funds. The first step in rebalancing is determining your target asset allocation. Your ideal asset allocation should be determined by your investment goals, risk tolerance, and time horizon. Once you’ve determined your target asset allocation, compare it to your current asset allocation to see if any changes are required.

To bring your portfolio back into balance, sell some of your over-weighted positions and buy some of your under-weighted positions. For example, if your target asset allocation is 60/40 stocks/bonds but your current allocation is 70/30, you will need to sell some stocks and buy some bonds to get back to 60/40.

It’s critical to consider the tax implications of your trades when rebalancing your hybrid fund portfolio. Selling securities may result in capital gains taxes, reducing your returns. To reduce the tax consequences of your trades, consider selling securities in tax-deferred accounts such as IRAs and buying securities in taxable accounts.


Finally, mastering the art of rebalancing is critical to improving the performance of your hybrid fund portfolio. Hybrid funds can be an excellent investment option for investors seeking exposure to both stocks and bonds, but they must be managed carefully to maximise returns. You can maintain your desired asset allocation and reduce risk by rebalancing your portfolio on a regular basis. When rebalancing your hybrid fund portfolio, remember to determine your target asset allocation, compare it to your current asset allocation, and consider the tax implications of your trades.

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