Financial Answer Center

Hybrid mutual funds have been around since the late 1920s. They are funds that are invested in common stock, preferred stock, bonds, and may have an international or a cash component as well.

Hybrid mutual funds may be suited for:

• Investors who are just starting out and want diversification within a single fund
• Investors who want a simplified portfolio of only one or two funds

One type of a hybrid mutual fund is called a "balanced fund." 

The ratio of stocks to bonds is determined by the fund's objectives and the fund manager. Funds with "balanced" or "income" in the name normally have a fixed ratio from which they can't deviate. On average, their ratio of stocks to other investments is approximately 60:40. Managers of balanced funds can, however, shift this ratio one way or the other to take advantage of high interest rates or stock market growth. These funds may be equity-oriented and skewed toward stocks, or income-oriented and skewed toward bonds. "Asset allocation funds," however, have some freedom to change their mix depending on the manager's evaluation of market conditions.

Before you decide to buy a hybrid fund, think about your asset allocation, and see what your ratio of stocks to bonds should be. If you are just starting out, pick a balanced fund whose allocation fits yours. If you already own some funds, pick a hybrid fund that will fill in the cracks in your portfolio. And remember, keep diversifying.