Which sequence correctly arranges hybrid mutual fund categories in increasing order of equity risk exposure?

[ A ]Aggressive Hybrid Fund -> Dynamic Asset Allocation Fund -> Conservative Hybrid Fund -> Arbitrage Fund

[ B ]Arbitrage Fund (65% hedged equity) -> Conservative Hybrid Fund (10-25% equity) -> Equity Savings Fund (15-40% net unhedged equity) -> Dynamic Asset Allocation Fund -> Aggressive Hybrid Fund (65-80% unhedged equity)[ CORRECT ]

[ C ]Conservative Hybrid Fund -> Aggressive Hybrid Fund -> Arbitrage Fund -> Equity Savings Fund

[ D ]Arbitrage Fund -> Aggressive Hybrid Fund -> Conservative Hybrid Fund -> Dynamic Asset Allocation Fund

Takeaway

Option B is correct: Arbitrage Fund (65% hedged equity) -> Conservative Hybrid Fund (10-25% equity) -> Equity Savings Fund (15-40% net unhedged equity) -> Dynamic Asset Allocation Fund -> Aggressive Hybrid Fund (65-80% unhedged equity)

Derivation

Hybrid fund risk is driven by unhedged equity allocation: (1) Arbitrage Funds hold >=65% equity fully hedged with stock futures, resulting in low risk similar to short-term debt. (2) Conservative Hybrid Funds hold 10-25% equity and 75-90% debt. (3) Equity Savings Funds hold 15-40% net unhedged equity alongside arbitrage and debt. (4) Dynamic Asset Allocation (Balanced Advantage) funds dynamically adjust equity between 30% and 80%. (5) Aggressive Hybrid Funds maintain 65-80% unhedged equity, carrying the highest risk among hybrids. This tests hybrid scheme selection. A common error is placing fully hedged Arbitrage funds at higher risk levels.

Why the others fail

A — Aggressive Hybrid Fund -> Dynamic Asset Allocation Fund -> Conservative Hybrid Fund -> Arbitrage Fund

This sequence represents decreasing equity risk, starting with the highest-risk Aggressive Hybrid category.

C — Conservative Hybrid Fund -> Aggressive Hybrid Fund -> Arbitrage Fund -> Equity Savings Fund

Arbitrage funds are fully hedged and carry lower market volatility than Conservative Hybrid and Aggressive Hybrid funds.

D — Arbitrage Fund -> Aggressive Hybrid Fund -> Conservative Hybrid Fund -> Dynamic Asset Allocation Fund

Aggressive hybrid funds maintain 65-80% unhedged equity and cannot be placed before conservative hybrid funds on an increasing risk scale.