Conservative Hybrid Fund
Before SEBI reclassified mutual fund schemes, these schemes were popularly called as monthly income plans. As their name suggests these schemes predominantly invest in debt and add a dash of equities to enhance overall returns. These schemes can invest 10% to 25% of their portfolio in equities.
Generally, these schemes are for conservative investors who want to dip their toes in equity markets. Retirees who want to add a small boost to their overall returns may also look at these schemes.
Balanced Hybrid Fund
Balance means an even distribution. These schemes have a relatively even division between their debt (40% to 60%) and equity assets (40% to 60%). Due to their nearly 50-50 debt and equity structure, these schemesmay be ideal for first time equity investors. By investing in these schemes, an investor can get a feel of equity market returns and volatility. At the same time, the downside will be protected by the debt investments. These schemes are directed at investors with moderate risk appetite.
As theequity allocation is below 65%, they are taxed like debt schemes.
Aggressive Hybrid Fund
Earlier these schemes were colloquially called as balanced funds, not to be confused with balanced hybrid schemes. These schemes broadly invert the asset allocation mix of conservative hybrid schemes as their equity allocation ranges between 65% and 80%. With an equity focused strategy these schemes tend to benefit from the growth potential of equities. Meanwhile the debt allocation helps limit the risk to some extent. These schemes are popular for long term goal planning. Generally, investors invest in these schemes to plan for their child’s education or their retirement, both of which are long term and fixed goals. Thus, investor can start planning for these goals early.
Historically,equity market tends to generate reasonable returns over longertenures. Moreover, the return fluctuations decrease as holding period increases.Predominant equity investment allows investors to benefit from the equity market rally while the long holding period reduces return volatility.
As these schemes have over 65% of allocation to equities, they are taxed like equity schemes.
Dynamic Asset Allocation or Balanced Advantage
When it comes to investments all investors, want to buy low and sell high. Dynamic asset allocation schemes aim to do just that. Using a pre-defined formula, these schemes shift their allocation between equity and debt. Current market PE, historical market data are some of the inputs for the calculation. Based on these inputs these schemes determine whether markets are expensive or cheap.
Generally, when valuations are high i.e. when markets are expensive there is a likelihood of correction and vice versa. Based on this premise, these schemes book profits in equities, invest it in debt in rising markets, and sell off debt to buy equity in falling markets. Through this juggling these schemes aim to buy low and sell high.
However, even deep analysis of historical trends cannot exactly predict how high a market will rise before finally turning. Hence, historically these schemes tend to underperform aggressive hybrid schemes in rising markets. Meanwhile, there strategy of booking profits reaps dividend in falling markets. This makes them suitable for moderate risk investors.
Overall, these schemescan beideal for people who do not want to actively track the markets but want to rebalance their portfolio basis market conditions. Typically, a busy middle-aged investor can consider investing in this fund. Moreover, as these schemes internally switch assets there is no tax implication for the investor unlike when he rebalances the portfolio himself.
While schemes in other categories have a more defined structure, this fund has immense flexibility in asset allocation. This allows the fund to swing either way based on anticipated market movement. The tax treatment of this fund follows its asset allocation.
Multi Asset Allocation
These schemes invest in a minimum of three asset classes; generally, these are equity, debt and gold. The minimum asset allocation to each asset class is 10%. Inherently these schemesare diversifiers. We observe that all asset classes do not rise and fall together. Usually, when interest rates increase continuously, equities see a correction (as it makes corporate loans more expensive) while short-term debt becomes attractive. In addition, movement in gold prices tend to be unrelated to the other asset classes.
Having a mix of these three asset classes in portfolio hedges the investor against negative movement in any one-asset. These schemes are suitable for investors with moderately high-risk appetite.
With gold remaining rang bound in the last few years, these schemescan be suitable for investors who want to take a small exposure to gold as a diversifier or investors who want a long-term allocation to gold in their portfolio.
Arbitrage is the simultaneous buying and selling of a security to capture any mispricing in different market segments. These schemes invest at least 65% of their assets in equity and equity derivatives to capture the arbitrage opportunities in the market. However, as their allocation to equity and related instruments is over 65% they are taxed like equities.
Before the government re-introduced long term capital gains tax these schemes were a popular alternative to liquid funds. This was because they provided returns similar to liquid funds and as an added bonus these returns were tax free.
Even now, risk averse investors looking to hold the fund for a year can invest in it. If the investor’s long-term capital gains for the year fall below Rs. 1 lakh, the returns will be tax free. Moreover, these schemes make sense from tax perspective if the investor falls in the higher tax brackets.
Equity Savings Fund
Minimum investment in equity & equity related instruments- 65% of total assets and minimum investment in debt- 10% of total assets. These schemes try to balance risk and returns by investing in equity, debt and derivatives. Use of derivatives reduces net equity exposure (around 20-40 percent, although it may vary from scheme to scheme) and consequently aims to protects investors from volatility of returns. This gives thisscheme a risk profile similar to conservative hybrid fund with the tax benefit of equities.
The fund could be ideal for conservative investors who want a small exposure to equities for returns but want to enjoy equity taxation benefits.