An outline of everything you need to know about hybrid mutual funds
If you are a mutual fund investor looking for a dynamic portfolio, then hybrid mutual funds are right for you, these funds give you the best of both worlds-equity and debt. Hybrid mutual funds help you meet your financial goals at a comparatively balanced risk and profits ratio.
When you see how hybrid mutual funds work, you will understand why they offer their investors the best of both worlds. Let's take an example. Mutual fund XYZ will invest in two asset classes- equity and debt. The equity portion gets good returns, albeit at some risk. Simultaneously, debt instruments in the fund's portfolio offer regular income through their reasonably reliable interest-generating model.
You may wonder why a hybrid fund works with this combination of asset classes? The answer is that there is a low correlation between these asset classes, which means the chances of the investor losing all their money are extremely low.
So, don't you think having a hybrid in the mutual fund world is as cool as having a hybrid in the automobile world?
With so many hybrid funds to choose from, even the most seasoned investor can get a little thrown off. So, the Securities and Exchange Board of India issues a circular regularly to classify different hybrid funds. Based on the latest SEBI circular, we have listed the seven types of hybrid funds available in India.
As the name indicates, a balanced hybrid fund balances its equity and debt investment. It invests a minimum of 40% and a maximum of 60% in either one of them. For example, if Balanced Fund ABC invests 55% of its portfolio in equity, it needs to invest 45% in debt instruments. The aim behind investing in a balanced hybrid fund is capital appreciation in the long-term while balancing the risk with debt investments.
Quite a strategic play, an arbitrage hybrid fund buys assets in the cash market or spot market, called so because the transactions are settled on the spot. Simultaneously, the fund manager leverages the volatility of the markets and sells the futures market's holdings to profit from the difference in the prices of the stocks and futures contracts. An arbitrage fund scheme invests 65%-100% of its funds into equity and 0-35% in debt.
This one likes to play with equity, debt, and derivatives to bring its investors a balance of risk and returns. They invest 65-100% of their funds into equity and equity-linked assets, while 0-35% are invested in debt assets.
With a conservative 10-25% of the total funds being invested in equity, you know why this type of hybrid fund investment is called 'conservative.' This type of fund's objective is to give its investor regular income by investing 75-90% of its funds in the debt asset class.
When 65-80% of the funds are allocated to the equity asset class, you will rightly call it an aggressive hybrid fund, won't you? The rest of the funds are invested in debt instruments, giving the overall fund some form of stability.
Why invest in just one asset class when you can put your eggs in multiple baskets? In multi-asset allocation, you invest in at least three asset classes: equity, debt, gold, gold-oriented schemes, and others. Each asset class needs to have at least a 10% allocation in the overall hybrid fund. It is up to the fund manager's judgment on how much to invest in which asset class.
Also known as 'balanced advantage funds,' this hybrid fund can go from 100% investment in equity to 0% if the market seems not to favour equities.
Next, let's look at what benefits hybrid funds have to offer its investors.
The benefits of investing in a mutual fund are further magnified when it is hybrid. Let's take a look at what makes hybrid mutual funds so popular.
You get access to investing in 2 asset classes by choosing one hybrid fund. As an investor, what's better than receiving the benefits of 2 from 1?
Yes, investing in equity and debt is inherent with a hybrid mutual fund. However, the fund manager can go further and allocate a portion of the equity to small-cap, mid-cap, and large-cap stocks to bring in more diversification and lower the risk.
Have a penchant for adventure? Then you can invest in an aggressive hybrid fund. Prefer to play it safe but like to indulge in some risk once in a while? Then a conservative hybrid fund is available to you. Whatever your risk profile, there is a hybrid mutual fund scheme for you.
A hybrid mutual fund allows the fund manager (and indirectly the investor) to sell the assets when the price is high and buy when the price is low. This allowance for changing the asset allocation within regulatory limits benefits those who invest in hybrid funds.
Unless you have more than 24 hours in your day, it can be challenging to keep track of your mutual fund investments and make modifications as per the latest market updates, along with your other 1000 everyday responsibilities. That's why having a fund manager to rebalance your portfolio according to the changing geopolitical statuses and market conditions becomes a boon.
Fairly convinced of the benefits of a hybrid fund? Okay, then let's consider the kind of taxes you will need to pay on your hybrid fund returns.
We will keep this simple.
Equity-oriented hybrid mutual funds- schemes that invest 65% and above in any form of equities- and arbitrage hybrid funds are taxed in the following way:
If the fund is held for beyond a year, it will attract a long-term capital gains tax at the rate of 10%. However, yields of up to Rs. 1 lakh in a financial year are exempted from tax in the given financial year.
When the funds are held for less than 1 year, they are considered short-term capital gains and taxed at 15%.
In case of other hybrid fund schemes:
If they are held for more than 3 years or 36 months, they are taxed at 20%. This amount is calculated after accounting for indexation.
When the funds are held for less than 3 years or 36 months, the gains are added to the investor's income and taxed as per the existing tax slabs.
Now that you know Hybrid Funds 101, you can go ahead and download digibank. The app will help you get started on your investment journey and become financially self-reliant.