Now you can gain the best returns from the world of equities and debt. Simply invest in a Hybrid Fund! Read on to know more
Hybrid funds or hybrid mutual funds are a type of mutual funds which invest in both debt as well as equity instruments in order to achieve maximum diversification and good returns. If you are a moderate investor with an average risk appetite, investing in a hybrid mutual fund is an excellent option.
The primary aim of a hybrid mutual fund is wealth creation in the long run and generate immediate income in the short-run via balanced portfolio. In a hybrid mutual fund, the fund manager allocates the investment amount in different proportions in equity and debt based on the financial goal of the fund and investor.
Hybrid funds are also safer in comparison to equity-based funds. Hybrid mutual funds provide higher returns than genuine debt funds and are very popular among conservative investors. For investors who prefer less risk and are new to the world of mutual funds, hybrid funds should surely feature in their investment portfolio. In times of economic crises and market volatility, the debt component helps stabilise the fund. This is beneficial in comparison to an equity fund which faces a complete burnout. Also, the dynamic asset allocation feature is an excellent method to generate good returns in times of market fluctuations.
Types of Hybrid Mutual Funds
Hybrid mutual funds are classified on the basis of their asset allocation.
Equity Orientated Hybrid Funds: Under this fund option, 65% or more of the fund’s assets are in equity while the remaining in debt and money market instruments. The equity comprises of shares of companies across industries like FMCG, finance, healthcare, real estate, automobile, etc.
Debt Orientated Hybrid Funds: Under this fund option, the debt component comprises of government backed fixed income instruments such as government securities, debentures, bonds, treasury bills, etc. In addition, there is also a small percentage of funds which is invested in cash and cash equivalents.
Balanced Funds: Under this fund option, 65% of the investment portfolio is in equity and equity-oriented instruments. They also qualify as equity funds for taxation. Gains over and above Rs. 1 lakh from balanced funds held for over one year are taxable at the rate of 10%. The remaining component of the fund goes to debt securities and cash reserves while the fixed income exposure to balanced funds helps in mitigating equity-related risks.
Monthly Income Plans: These funds primarily invest in debt instruments. It will have 15-20% exposure to equities. Such a fund generates higher returns than regular debt funds. They are ideal for investors looking for regular income in the form of dividends.
Arbitrage Funds: An arbitrage fund is a fund which seeks to take advantage of the price variation between stocks trading in different indices. An arbitrage fund manager tries to maximize returns by buying stock at a lower price in one market and selling the same at a higher price in another market. Arbitrage funds guarantee the same safe like debt funds.
Should you Invest in Hybrid Funds?
Yes, but please consider the following points before investing.
Risk Factor: Any type of mutual fund is not free from risk because any instrument which invests in equity markets carry risk due to market conditions. Therefore, exercise caution and rebalance your portfolio accordingly.
Returns: You must know that no hybrid mutual fund offers guaranteed returns. The performance of underlying securities affects the Net Asset Value (NAV) of these funds. The performance of underlying securities depends on market conditions which fluctuate on a daily basis. Also, hybrid mutual funds do not offer dividends during market downturns.
Cost: Cost refers to the expenses charged by the fund house/manager for managing your portfolio. This is also known as expense ratio. You should always pick a hybrid mutual fund which has a low expense ratio than other competing funds, as this translates into higher take-home returns for the investor.
Investment Horizon: The ideal investment horizon of a hybrid mutual fund for a medium term is five years. Arbitrage funds are safe as they bet on price differentials of securities in different markets.
Financial Goals: If you have an intermediate financial goal of purchasing a car or funding higher education. You can also avail a dividend option.
Recommended Read: Is It Time To Invest In Index Funds?