Equity funds and debt funds are two types of mutual funds. Hybrid funds combine the best of both. They can provide better returns than debt funds and are considered more stable than pure equity funds. This is why many new mutual fund investors prefer to invest in hybrid funds.
This article presents everything you need to know about hybrid mutual funds.
What are hybrid funds?
How hybrid funds work?
Hybrid funds aim to generate income in the short-run and achieve wealth appreciation in the long-run via a balanced portfolio. As part of your mutual funds’ investment plans, a fund manager can distribute your money between equity and debt. They can take advantage of market movements by buying or selling securities.
Who should invest in hybrid funds?
Budding investors who are just getting started with mutual fund investment can consider hybrid funds as the first step. These funds are a perfect mix of equity and debt and offer conservative investors an opportunity to ride the equity wave without much risk. At the same time, the debt component of the fund provides a cushion against extreme market volatility.
Types of hybrid funds
Following are the kinds of hybrid funds based on their asset allocation:
- Equity-oriented hybrid funds
An equity-oriented hybrid fund constitutes 65% or more of equity and the rest in debt and money-market instruments. Equity shares of companies across industries like finance, healthcare and FMCG make up for the equity component of the fund.
- Debt-oriented balanced funds
Investments in fixed-income avenues such as debentures, bonds, government securities and treasury bills constitute the debt component of the fund. A debt-oriented balanced fund has an asset allocation of 60% or more in debt and the rest in equity. Some part of the fund may also be invested in cash and cash equivalents for liquidity.
- Balanced funds
Balanced funds constitute 65% equity and equity-oriented instruments, and the rest in debt securities and cash reserves. Thus, they can qualify as equity funds for taxation. However, it can help to know that gains above Rs. 1 lakh held for more than one year are taxable at 10%.
- Monthly income plans
These hybrid funds invest predominantly in debts and a minor fraction in equities, generally 15% to 20%. This can allow you to earn higher returns than regular debt funds. Monthly income plans provide income in the form of dividends. They also come with a growth option that let investments grow in the fund’s corpus.
- Arbitrage funds
These funds involve buying the stock at a lower price in one market and selling them at a higher price in another market. In the absence of arbitrage opportunities, an arbitrage fund manager may stick to cash or debt instruments.
Things to consider while investing in hybrid funds
- Hybrid funds are not entirely risk-free. It is a good idea to balance your portfolio regularly.
- The fluctuation of market movements can affect the net asset value of hybrid funds. They may not offer guaranteed returns.
- Before investing in a hybrid fund, you may want to ensure it has a low expense ratio.
- You can stay invested in hybrid funds for a medium-term, around five years. Also, you can choose arbitrage funds if you want to earn a risk-free rate of return.
You may want to consider the various qualitative and quantitative parameters mentioned above before you invest in mutual funds. Additionally, keep in mind your financial goals, investment horizon and risk appetite.