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What is a Hybrid Fund
Hybrid Funds also known as Asset Allocation Funds, or Balanced Funds, are a perfect blend of debt and equity assets, which help investors build a diversified portfolio. A Hybrid Fund can be explained as an opportunity to the investors for investing in multiple asset classes through a single fund. These are more appealing as they cater to different risk profiles.
Investors have different needs and want to create their portfolios based on financial goals, risk tolerance, and other factors. Depending on these factors they need to opt for high-risk or low-risk investments. Hybrid Funds are designed to cater to investors’ objectives and provide them with a combination of equity and debt investments depending on their risk preferences. So now that we know what a Hybrid Fund is, let’s talk about how it works.
How Does a Hybrid Fund Work
Hybrid Funds are a combination of stocks and bonds, where asset allocation can remain fixed or may change in due course of time. As asset classes can perform differently for a particular period, fund managers try to move funds to the asset class which they feel will perform better during particular periods. The fund manager also tries to manage the risk of the fund by investing in different asset classes.
For example, if the fund manager thinks that equity markets are overvalued then they will reduce exposure of equity and increase the asset allocation to the debt category and vice-versa. Generally, the fund manager will rely on some objective model to ascertain the direction of the market to decide the asset allocation.
For example, suppose an investor invests in two asset classes, equity, and debt. Instead of the investor deciding the asset allocation on a dynamic basis, he/she can invest in a Hybrid Fund and depend on the fund manager to take such calls. The equity part yields them a good return with some risk involved. At the same time, the debt portion provides them with stability through a reliable interest-generating scheme. Thus, the investors can expect a better return on their overall investment.
A Hybrid Fund provides the opportunity for the investors to create a balanced portfolio with regular income, simultaneously providing them with capital appreciation in the long term.
What are the Types of Hybrid Funds
Hybrid Funds can be categorized as under:
- Multi-Asset Allocation Hybrid Funds: These require investments in at least three asset classes with a minimum of 10% in each category. They provide more exposure for the investors as they can choose more asset classes.
- Balanced Hybrid Funds: Under these schemes’ investments are done in the ratio of 40%- 60% in equity and debt asset classes. Equities help generate a long-term capital gain, simultaneously balancing the risk through debt allocation.
- Aggressive Hybrid Funds: Here the ratio of the equity asset class is from 60-80%, while 20-35% can be allocated in the debt asset class. They offer a high return at comparatively low risk.
- Dynamic or Balanced Advantage Funds: These funds dynamically manage investment in equity and debt instruments based on the recommendation of the financial model. They are most suitable for investors who like to automate their asset allocation.
- Conservative Hybrid Funds: These schemes invest 10-25% of the total value in equity, and the remaining 75-90% in the debt asset class. The point of investing here is to generate a steady income from the debt part and get high returns from the smaller equity component.
- Equity Savings Funds: These funds provide balance returns by investing in equity, debt, and arbitrage opportunities. Derivative provides a stable return while equity provides growth. The proportion of investment under these funds is a minimum of 65% in the equity asset class and a minimum of 10% in the debt asset class.
- Arbitrage Funds: This is the procedure of buying through the cash market, and selling the funds in the derivatives market to generate returns. These funds have a minimum allocation of 65% towards equity and related instruments. Mostly suitable for investors who want to take low risks and like to generate debt-like returns with equity, enjoying the high volatility of the market.
What are Hybrid Fund Advantages
Hybrid Funds provide the following advantages to the investors:
- They offer access to multiple asset classes, without the need of investing in different funds.
- They provide active risk management with a diversified portfolio.
- These funds diversify the investor’s portfolio across sub-categories within the asset class. For example, they invest in Large, Mid, and Small-cap stocks.
- They offer various levels of risk tolerance ranging from aggressive, conservative, and moderate.
- They rebalance the portfolio by adjusting asset allocation by selling a particular asset class when the market is high and buying it when the rates are low.
- They also rebalance the portfolio on their own, saving the time of the investors to track the volatility of the markets.
Who Should Invest in Hybrid Funds
Investors who don’t want to actively manage their own portfolio and are also not willing to take the higher risk that comes with pure equity investment should consider Hybrid Funds for investment. An investor who requires a diversified portfolio with just one mutual fund scheme should invest in Hybrid Funds. These funds can be aggressive, or conservative, as per the choice of investors. Allocation of the asset class categorizes these funds in terms of risk. Moreover, the investors who want to lower the risk on their investments can choose Hybrid Funds, as they diversify the investment within multiple asset classes providing them with maximum returns with minimized risks.
Taxation on Hybrid Funds
Taxation on Hybrid Funds in India can be categorized as under:
- For Equity Oriented Hybrid Funds (where equity component is more than 65%):
- Long Term Capital Gains Tax: When the Hybrid Funds are held for more than one year, they come under long-term capital gains tax at the rate of 10%. However, returns in a given financial year that are up to Rs. 1 Lakh are exempted from tax.
- Short Term Capital Gains Tax: The funds held for less than one year are short-term and are taxed at 15%.
2. For Debt Oriented Hybrid Funds (where debt component is more than 65%):
- Long Term Capital Gains Tax (More Than Three Years of Holdings): Holding of more than 36 months of Hybrid Funds are taxed at the rate of 20%, which is calculated post indexation benefits.
- Short Term Capital Gains (Less Than Three Years): The profits from Hybrid Funds when held for less than 36 months, are added as in the investor’s income and taxed as per the tax slabs of that financial year.
Factors to Consider Before Investing in Hybrid Mutual Funds
Investors are advised to consider the following factors before investing in Hybrid Funds:
- Risk: It is critical to note that Hybrid Funds are not a completely risk-free investment. Equity markets are highly volatile and always bear some risks. However, these funds are less risky than pure equity funds, as the portfolio is rebalanced at frequent intervals and equity exposure is reduced if valuations are considered to be high.
- Return: Nobody can assure you with guaranteed returns. The returns from Hybrid Funds depend on market performance.
- Charges: A small fee is required to be paid for Hybrid Funds in order to maintain your portfolio. These charges are known as the expense ratio. Watch for a lower expense ratio before investing in a Hybrid Fund.
- Investment Time Horizon: Hybrid Funds require a waiting period of around 3-5 years. The longer they are held, the better return you can expect from them.
- Investment Goals: Investors can meet their financial goals whenever they like, with Hybrid Funds.
How to Invest in Hybrid Funds with Nivesh
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
Frequently Asked Questions (FAQs)
1. Are Hybrid Funds Safe?
Hybrid Funds are considered relatively safe investments when the investors can wait for a long period, say a minimum of 3 years or even more. The longer the time horizon the better the ability of the investor to wait for an appropriate return if the market conditions are not favorable in the interim.
2. What are Hybrid Funds?
Hybrid Fund meaning: These are mutual fund schemes where investments are done in a mix of equity and debt. These are less volatile than pure equity funds and offer a comparatively stable income for the investors.
3. Who Should Invest in Hybrid Funds?
Investors who don’t want to actively manage their portfolio between equity and debt can opt for Hybrid Funds. They are also good investment options for new investors who have less knowledge of equity markets.
4. How are Hybrid Mutual Funds Taxed?
Gains from Hybrid Mutual Funds are taxable as per capital gains tax rules in India. The gains from a Hybrid Fund could be taxed either in the equity gain or debt gain category, depending on the exposure of the fund to equity or debt as an asset class.
5. What are the Tips for Investing in Hybrid Funds?
While investing in Hybrid Funds check for:
- Choose funds that align with your financial goal, i.e., you want to invest for the long term or a short term.
- Understand your tax liability while investing in Hybrid Funds.
- Choose funds as per your risk ability. Higher risks mean higher returns and vice-versa.
- Take advice from the experts, if you need help in ascertaining the right fund for you.
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