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How to Choose the Right Hybrid Mutual Fund?

Rashmi Ghosh Rashmi Ghosh 08 May 2019

There are different types of hybrid mutual funds. Read on to know for whom each of them is suitable.

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Before we move on to discussing how to choose the right hybrid mutual fund, let’s introduce you to the concept of hybrid mutual funds, in a jiffy. Classified under the mutual fund category, a hybrid fund invests in a mix of debt funds and equities. They can be differentiated according to their asset allocation. Certain types of hybrid mutual funds have a comparatively higher equity allocation, and vice versa. For example, at least 65% is invested in equities in equity-oriented hybrid funds, while the rest is invested in debt and money market instruments. The debt component of hybrid mutual funds comprises of investments in fixed income instruments such as government securities, bonds, debentures, treasury bills, etc. On the other hand, the equity component includes equity shares of companies of varied sectors.

The objective is to aim for maximum portfolio diversification as a means for optimizing returns on investment. Hybrid mutual funds have been further divided into 6 categories by Securities and Exchange Board of India (SEBI). They have been divided keeping in mind the varied investment objectives and risk appetites of mutual fund investors.

The parameters that need to be considered while selecting hybrid funds are the same as is applicable for all mutual fund investments. Here are the questions you should ask yourself while choosing the right hybrid mutual fund.

  • Is the hybrid fund in sync with your investment objective?
  • Does it suit your risk appetite?
  • Does the cost of the mutual fund unit suit your pocket?
  • Is the investment horizon aligned with your financial goals?
  • Has the past performance of the mutual fund been positive?

Types of Hybrid Mutual Funds and Who They Are For

Let’s take a look at the types of hybrid funds, and their suitability to varied investment objectives and risk appetites.

Conservative hybrid funds

This category of hybrid mutual funds invests up to 25% in equity and the rest in fixed income. As the name suggests, this has been especially designed for conservative investors, that is, investors with a low risk appetite. It is also well suited for those investors looking for an additional source of income to supplement their annual salary. Since only a minimal percentage of the portfolio is invested in equities, the high capital market risks that are typical to equity investments are also restricted. However, it is advisable that you don’t invest in a lump sum, despite its low risk exposure, to further avoid the chances of loss due to market volatility.

Equity-oriented hybrid funds

For this fund, at least 65% of the assets are allocated in equity, while the remaining is invested in debt and money market instruments. Equity component includes company equity shares across industries like finance, real estate, FMCG, healthcare, automobile, etc.

Balanced Funds

These hybrid funds invest a minimum of 65% of their portfolio in equity and equity-oriented instruments, enabling investors to avail tax benefits. Capital market gains from balanced funds that exceed Rs. 1 lakh over a period of 1 year are taxable at the rate of 10%. The remaining assets are invested in cash reserves and debt securities. It serves the dual benefit of generating healthy returns as is typical from equity investments, but with comparatively lower risks. What’s more, preventing equity-related risks gets balanced by fixed income exposure.

Debt-oriented Balanced Funds

Here, more than 60% of the assets in the portfolio are allocated in debt, while the rest is invested in equity. The debt component is invested in fixed income like government securities, treasury bills, bonds, securities, etc. It also invests in cash and cash equivalents, offering investors the benefit of liquidizing their assets.

Arbitrage Funds

This fund specializes in purchasing stocks at a comparatively lower rate than the prevailing market price. The fund manager then sells the same stocks at a higher price in another market. However, arbitrage opportunities are few and far between. In the absence of such opportunities, these hybrid funds invest in cash or debt instruments. Like most debt funds, they are a comparatively safe investment option. But, as in the case of equity funds, their capital gains are taxable.

Aggressive Hybrid

These hybrid funds are often recommended to novice investors with a lengthy investment horizon of between 10 years and 15 years. Such investors are usually in the accumulation phase, and when they get a hang of how equity mutual funds work, they gradually invest in small cap, mid cap and multi cap funds.

To wind up

Once you’ve had a clear idea of the hybrid mutual fund classifications, you would be able to take a decision on the type that is the best fit for you. Make a choice and dive right in!

Recommended Read: Advantages for Equity Investors in FY 2018-19

Rashmi Ghosh
Written by Rashmi Ghosh
Digital enthusiast, dreamer with a colourful mind and shares her soul with canines. She survives on coffee, and food and travel feature among her topmost priorities.