A Few Words About Hybrid Funds

Hybrid funds are mutual funds that invest in a mixture of stocks, bonds, and cash to meet a certain objective, such as growth or income. They offer investors, who are interested in managing risk, the benefit of one-stop asset diversification. By holding assets that perform well at different business cycle phases, hybrids have built-in "shock absorbers" that tend to cushion downturns in any one market segment.

In particular, the income-producing assets held by hybrids (such as stocks with high dividends, bonds, and short-term cash equivalents such as certificates of deposit (CDs)) may generate returns that can help offset a flat or declining equity market. However, the price for this protection might be middle-of-the road performance (and typically underperformance when stocks are hot).

So, Who Needs a Hybrid?

Since investors can create their own hybrid portfolio by choosing several stock and bond funds which, taken as a group, can provide asset allocation, is there any reason to invest in one fund that does it all for you?

An asset allocation portfolio constructed using a variety of stock and bond funds is an excellent strategy for many investors. However, one can lose sight of the total portfolio and focus on individual fund performance, especially when either an individual stock or bond fund suffers a sharp decline. Even though we understand that asset allocation means some assets will perform better than others, for a given time period, it may sometimes be hard to resist the natural tendency to want to get out of a fund that has lost ground.

This is where hybrid funds may have an advantage. Because the asset allocation decisions in a hybrid fund are made by the fund manager, holding a hybrid can sometimes help keep the focus in view-that is, a hybrid may save us from our own short-sighted investment impulses, especially during stock or bond market downturns. In addition, for those investors who have difficulty deciding when (and by how much) to rebalance their portfolios, hybrids may offer an attractive alternative.

A Matter of Style

In the investment world, there are just about as many strategies as there are investors, and despite their advantages, hybrids may not be the best choice for everyone. For example, some investors may favor strategies that require more active involvement in asset allocation.

On the other hand, other investors, who have neither the time nor the inclination to be actively involved in their portfolio management, may view hybrids as providing just the right ticket for a ride more complementary to their passive investment style.

Finally, regardless of personal investment style, investors seeking an "anchor" for their overall portfolios may want to consider hybrid funds. As always, your investment choices should complement your risk tolerance, time horizon, and ultimate objectives.

When investing in mutual funds, remember that past performance is not a guarantee of future results. Investment returns and principal values of mutual funds will fluctuate in response to market conditions. As a result, when shares are redeemed, they may be worth more or less than their original cost.

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