Hybridfund

What Are Hybrid Funds? Insight Into Multi-Asset Class Investments

Key Takeaways

A hybrid fund invests in multiple asset classes, typically stocks and bonds, to diversify a portfolio and reduce risk.
Balanced funds are a type of hybrid fund with a common allocation of 60% stocks and 40% bonds.
Blend funds combine growth and value stock strategies within a single portfolio for greater diversification.
Hybrid funds are known for employing multiple asset classes and are calculated to fit varied risk tolerances from conservative to aggressive.
Target date funds shift from aggressive to conservative allocations over time, making them another form of hybrid funds.

What Is a Hybrid Fund?

A hybrid fund is a type of investment fund that diversifies among multiple asset classes, such as stocks and bonds, to provide a balanced risk and return profile. These funds aim to deliver a diversified portfolio through a single investment, making them accessible and appealing to many investors. They may also be known as asset allocation funds.

Investors who are interested in spreading risk across different asset types while maintaining efficiency might consider hybrid funds, which offer a blend of growth and income potential. Common variants include balanced funds and target-date funds, each designed with specific investment goals and strategies in mind.

We'll explain the mechanics of hybrid funds and their advantages, and give you examples of popular funds to help you make informed investment decisions.

How Hybrid Funds Work

Hybrid funds offer investors a diversified portfolio. The term hybrid indicates that the fund strategy includes investment in multiple asset classes. In general, it can also mean that the fund uses an alternative mixed management approach.

Hybrid funds are commonly known as asset allocation funds. In the investment market, asset allocation funds can be used for many purposes. These funds offer investors an option for investing in multiple asset classes through a single fund.

Hybrid funds evolved from the implementation of modern portfolio theory in fund management. These funds can offer varying levels of risk tolerance ranging from conservative to moderate and aggressive.

Balanced funds are also a type of hybrid fund. Balanced funds often follow a standard asset allocation proportion, such as 60/40.

Target date funds or lifecycle funds also fit into the hybrid category. These funds invest in multiple asset classes for diversification. Target date funds vary from standard hybrid funds in that their portfolio portions begin with a more aggressive allocation and progressively rebalance to a more conservative allocation for use by a specified utilization date.

A blend fund (or blended fund) is a type of equity mutual fund that includes a mix of both value and growth stocks. These funds offer investors diversification among these popular investment styles in a single portfolio.

In all cases, hybrid funds will include some mix of two or more asset classes. In risk-targeted and balanced funds, allocations will typically remain at a fixed proportion. In funds targeting a specified utilization date, the proportion of asset mix will vary over time. In all of the funds, the investment manager may actively manage the individual holdings within each asset category to respond to changing market conditions and potential capital appreciation opportunities

Notable Hybrid Fund Examples

Investment managers offer a wide range of options for hybrid funds. Below are two examples.

Vanguard Balanced Index Fund (VBIAX)

This fund has a 60/40 balance among stocks and bonds. The stock portion of the portfolio seeks to replicate the CRSP U.S. Total Market Index. The bond portion of the portfolio seeks to replicate the Bloomberg U.S. Aggregate Float Adjusted Index. The fund has an expense ratio of 0.06% as of Q2 2021.1

T. Rowe Price Retirement 2060 Fund (TRRLX)

The T. Rowe Price Retirement 2060 Fund is a hybrid target-date fund. As of May 2021, it had more than 90% of the portfolio in stocks and approximately 8% in bonds and other fixed-income securities. The fund uses a fund of funds approach with 19% of the portfolio in a growth stock fund. The fund has an expense ratio of 0.71% as of Q2 2021.2

Vanguard. "Vanguard Balanced Index Fund Institutional Shares (VBAIX)." Accessed May 5, 2021.

T.RowePrice. "Retirement 2060 Fund (TRRLX)." Accessed May 5, 2021.

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