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.