Hybrid Mutual Funds

Who Should Invest in Hybrid Funds?

Both novice & experienced investors can make wise investments with hybrid mutual funds due to their great versatility.

1. New Investors in Mutual Funds: Novice investors are accustomed to security offered by conventional fixed income products, such as term deposits.
2. Investors with 3-5 Years Investment period:  intending to invest for medium-term goal, such as purchasing car, require growth but with less volatility. 
For this type of investor, hybrid mutual funds offer viable choice. This is because returns are comparatively less variable due to debt component of investment.
3. Retired Individuals: Those in this group are seeking steady stream of income to supplement their wages from their working years. 
4-Asset allocation seekers: These investors desire portfolio with specific asset mix, but they lack time or knowledge to monitor markets & oversee their asset allocation.

How Hybrid Fund Works?

Two asset classes that hybrid funds primarily invest in are debt & equities. Although equity as asset class has ability to produce large returns & wealth, it also involves greater risk of volatility over near term. Conversely, interest-bearing assets that produce consistent revenue stream are included in asset type known as debt. When it comes to asset classes, debt is less risky than equity. Because of their low connection, combining asset classes of debt & equity lowers risk of portfolio. In essence, hybrid mutual fund seeks to provide greatest features from both asset classes in single offering.

In essence, hybrid mutual fund seeks to provide greatest features from both asset classes in single offering. When equity markets are performing well, their equity portion generates returns, & when market is underperforming, their debt portion acts as buffer. It seeks to provide short-term security & consistent income through debt in addition to long-term capital appreciation through equity. fund management always keeps right amount of assets allocated based on fund's goal & state of market.
 

Benefits of Hybrid Mutual Fund

Following are some advantages that Hybrid Funds provide so that you can begin investing in them: 

•    Compared to debt funds, hybrid funds are thought to be riskier, but safer than equity funds. They are favored by many low-risk investors & typically deliver higher returns than debt funds.
•    Hybrid funds are also often chosen by novice investors who are hesitant to enter equity markets. This is so that they can test waters with equity while having stability provided by debt component.
•    With hybrid funds, investors can protect themselves against excessive market volatility while still getting most out of their stock investments.
 

Types of Hybrid Funds

1- Equity-Oriented hybrid fund: At least 65% of total assets of equity-oriented hybrid fund are allocated to equities & equity-related securities of businesses with range of market capitalizations & industries. Money market instruments & debt securities make up remaining 35% of investment.

2- Debt-Oriented hybrid fund: Debt-focused hybrid fund allocates minimum of 60% of its overall assets to fixed-income instruments such as government securities, bonds, & debentures. 40% of money is allocated to equity. Tiny portion of capital of some funds is also allocated to liquid programs.

3- Balance Funds: These funds allocate at least 65% of their total assets to cash & debt securities, with remaining portion invested in equity & equity-related instruments. Their tax classification is as equity funds, & they provide exemption from taxes on long-term capital gains up to maximum of Rs. 1 lakh. Because it reduces volatility of stock investments, fixed income component makes it smart choice for equity investors.

4- Monthly Income Funds: Monthly Income Plans are hybrid funds that invest mostly in fixed-income securities & allot tiny percentage of their total assets to equities & instruments linked to equity. This enables fund to provide investors with consistent income & enables these plans to yield higher returns than debt schemes alone. Most plans also provide growth option, in which corpus of fund increases with income.

5-Arbitrage funds: In one market, arbitrage funds purchase equities at discount & sell them at premium. fund manager maximizes profits on investment by continuously searching for arbitrage opportunities.

Tax Implications on Hybrid Funds

For purpose of calculating tax, fund is considered equity-oriented if it contains at least 65% of equities or equity-oriented securities. Every other plan is considered to be other plans

1. Equity-Oriented Schemes: 

For taxation reasons, equity-oriented funds include both hybrid funds in mutual funds & arbitrage funds. When compared to other schemes, taxation system for equity plans is beneficial.

Long-Term Capital Gains: Equity mutual funds are subject to 10% long-term capital gains tax if they are held for more than year. Profits are tax-free up to ₹1 Lakh in fiscal year.
Gains from these schemes are considered short-term capital gains & are subject to 15% tax if they are held for less than year.

2. Other Schemes

Long-Term Capital Gains: After allowing for indexation, long-term gains on units held for longer than 36 months are subject to 20% tax rate.

Other schemes held for less than three years are classified as short-term capital gains. These will be included in income & subject to taxation based on investor's appropriate income tax slab.

Factors to Consider Before investing in Hybrid Mutual Funds

Here are key factors to consider before investing in hybrid mutual funds:

1. Risk Tolerance: Evaluate your risk tolerance level. Hybrid funds invest in both equity & debt instruments, so understanding your risk appetite is crucial. If you can handle market volatility, you might opt for equity-oriented hybrid funds. For more conservative approach, consider debt-oriented hybrids.

2. Investment Horizon: Consider your investment horizon. hybrid funds in mutual funds are suitable for medium to long-term goals. If you have shorter time frame, it’s essential to choose fund that aligns with your investment duration.

Remember to research specific funds, compare expense ratios, & analyse historical performance before making any investment decisions.