Hybrid funds are a versatile category of mutual funds that strategically diversify their investments across various asset classes, including equities, debt instruments, and sometimes even commodities like gold, etc. These funds are engineered to construct a well-rounded portfolio by strategically allocating funds to multiple asset types. Within hybrid funds, the equity component serves as a source of potential growth, while the debt portion contributes to stability. The objective of hybrid funds is to provide investors with a balanced investment strategy, harmoniously merging the growth potential of equities with the lower-risk characteristics of fixed-income investments, and occasionally, commodities.
Types of Hybrid Funds:
Conservative Hybrid Fund: Conservative hybrid funds typically allocates 10% to 25% to equity and equity-related instruments, while the remaining 75% to 90% is invested in debt instruments.
Balanced Hybrid Fund (no arbitrage): Balanced hybrid funds aim to maintain a balance by investing between 40% to 60% in both equity and debt instruments.
Aggressive Hybrid Fund: Aggressive hybrid funds have a higher equity exposure, with 65% to 80% in equities and 20% to 35% in debt instruments.
Dynamic Asset Allocation or Balanced Advantage: Balanced advantage funds have the flexibility to allocate anywhere from 0% to 100% in equity and debt, allowing them to adapt to market conditions.
Multi Asset Allocation: Multi asset allocation funds invest in at least three or more asset classes, such as equity, debt, gold, etc., with a minimum allocation of 10% to each.
Equity Savings: Equity savings funds have a minimum of 65% allocated to equity and a minimum of 10% in debt instruments.
Arbitrage Funds: Arbitrage funds are equity-oriented hybrid funds that seek to generate returns by leveraging the price differential between cash and derivative market.
What are the Features of Hybrid Mutual Funds?
Diversification
The most significant advantage of investing in hybrid funds is diversification. Investing in a single hybrid scheme can give you exposure to two or more asset classes.
Active Fund Management
These are actively managed funds where fund managers constantly look for opportunities to generate long-term returns.
Can be suitable depending on Risk Profile
With options like aggressive, conservative, dynamic asset allocation, and more, there are hybrid schemes for every risk profile.
How Do Hybrid Funds Work?
Hybrid funds invest in two or more asset classes that aim to generate long-term returns and offer the potential for long-term wealth creation through capital appreciation.
Fund managers build an investment portfolio as per the scheme objectives and actively manage and rebalance the portfolio according to the market conditions to deliver returns. As these are generally open-ended schemes, investors are free to invest and redeem their investments as they see fit.
How to Invest in Hybrid Funds?
You can make a lump sum amount or start a Systematic Investment Plan (SIP) in any hybrid scheme of your choice. Here are the steps you can follow to invest in hybrid funds-
Compare the top hybrid funds and choose one as per your financial goal and risk appetite
Visit the official website of the fund house offering the selected scheme
Register for a new account and complete online KYC, if you are already a registered user, directly transact.
Once your account is ready, search for the hybrid scheme you’d like to invest in
Choose between lump sum and SIP
Make the investment online
Depending on the investment amount and NAV of the scheme, the fund house will allot a certain number of units to your account within a maximum of 5 working days. You’ll receive an email update after investing and once the units are allotted.
Click Here to know what is SIP?
Who Should Invest in a Hybrid Fund?
Hybrid funds cater to several categories of investors, including:
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Diversification Seekers: Investors looking to reduce risk through diversification across asset classes can benefit from hybrid funds.
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Balanced Investors: Those seeking a balance between growth potential and income can achieve this balance through hybrid funds.
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Low-Risk Takers: Conservative investors can gain some equity exposure for potential growth while limiting risk through the fixed-income portion of hybrid funds.
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New Investors: Novice investors can instantly diversify across equities, fixed income, and other assets through hybrid funds, provided they understand the meaning and properties of these funds before investing.
Benefits of Investing in a Hybrid Fund:
The key advantages of investing in hybrid funds include:
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Diversification: Hybrid funds provide exposure to multiple asset classes in a single fund, reducing overall portfolio risk.
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Balance of Growth and Stability: The mix of equities and fixed income allows for a balance of growth potential and stability within one fund.
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Simplicity: Owning a hybrid fund provides instant diversification, eliminating the need to select multiple funds covering different assets.
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Professional Management: Hybrid funds are professionally managed to allocate assets across classes based on market conditions.
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Simplified Diversification: They offer a simplified way to gain diversified exposure without needing to build your own multi-asset portfolio .
Taxation on Hybrid Funds
For Equity Oriented Hybrid Funds:
On Redemption:
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For investments held for less than 12 months, Short-Term Capital Gain Tax applies at a rate of 15% (plus applicable surcharge and cess) on any gains/profits.
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Investments held for more than 12 months are subject to Long-Term Capital Gain Tax at a rate of 10%, without indexation (plus applicable surcharge and cess), provided the gain in a financial year exceeds Rs 1 Lakh. Cumulative long-term capital gains on equity and equity-oriented funds up to Rs 1 Lakh in a financial year are not taxable.
On IDCW (Income Distribution Cum Capital Withdrawal):
Any income received under this option is considered income for investors and taxed at applicable tax slab rates.
For Debt Oriented Hybrid Funds:
On Redemption:
Pursuant to amendment to the Finance Bill 2023, any capital gains earned on investments made in these schemes on or after 1 April 2023, will be considered as short-term capital gains and added to the investor’s income and taxed at the applicable income tax slab rates (plus any applicable surcharge and cess), regardless of the investment holding period.
Please note that investments made on or before March 31, 2023, and held for more than 36 months will be eligible for indexation benefit in taxation. Gains on such investments will be taxed at a rate of 20% (plus applicable surcharge and cess) after taking into account the indexation benefit.
On IDCW
Any income received under this option would be considered as income for the investors and hence would be taxed at applicable tax slab rates.
What are the Things You Should Consider Before Investing in Hybrid Funds?
Now that you know what is a hybrid fund, its features, and how to invest, you can start investing. But don't forget to consider these factors before you begin-
Financial Goals
When selecting a hybrid fund, ensure that the scheme’s objective aligns with your financial goals.
Investment Horizon
Investors can opt for Aggressive hybrid schemes for a longer investment horizon of 5 years or more. On the other hand, investors can select conservative hybrid funds for short to medium-term investment horizons.
Risk Appetite
Consider your risk appetite before investing in hybrid funds. For instance, aggressive schemes can be opted for risk-bearing investors, and conservative hybrid schemes can be opted for risk-averse investors.
Past Performance
While comparing top hybrid funds, you should check the past performance of the scheme, at least 5-10 years.
Build a Diversified Investment Portfolio with Hybrid Mutual Funds.
By investing in more than one asset class , hybrid funds make it easier for investors to build a diversified portfolio. Moreover, with all the different hybrid schemes available, it is easier to select one based on your goals and risk appetite.
If you are new to mutual funds, it'd be wise to start small and grow your investments as you gain more knowledge and experience. As all mutual funds come with a certain risk level, you can consult an investment advisor before investing.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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