Planning to invest in hybrid funds but confused about the options available? Clarity of various hybrid fund categories can help you in making an informed decision. Let’s find out more about them.
Want a balanced portfolio that provides handsome returns with minimum risk? Consider investing in hybrid funds. Placed under the mutual fund category, a hybrid fund, also known as a balanced fund invests in a combination of debt funds and equities. The diversification of investment allows you to enjoy capital appreciation via the equity component and safe returns through allocation in debt instruments. How to select the best hybrid fund for your portfolio? The key is to understand the essential features of different types of hybrid funds and then decide which ones match your risk profile, financial objectives, and investment horizon.
Securities and Exchange Board of India (SEBI) has classified hybrid funds into different categories based on asset allocation across equity and debt products.
An equity-oriented hybrid fund maintains at least 65% equity exposure by investing the majority of its corpus in the equity stock of companies across various markets and sectors (finance, real estate, FMCG, healthcare, automobile, etc.). The remaining 35% investment goes into debt, debt-related instruments, etc. The added perk is that they are considered as equity funds for taxation purposes and hence the long-term gains up to Rs 1 lakh in a year from the funds sold after one year are exempt from tax.
Who should opt for it? These funds are ideal for moderately aggressive investors willing to take a little risk to earn high returns.
These investment schemes invest the majority of the total resources in fixed income securities like treasury bills, debentures, bonds, and other debt instruments. The rest goes into equity stocks alongside cash and cash counterparts. The debt-oriented hybrid funds aim to provide investors with a steady income through dividends at regular intervals (annually, biannually, quarterly, or monthly). They also offer the “growth option” which allows reinvestment of dividends for wealth creation.
Who should opt for it? This is ideal for conservative investors who are looking to generate more steady returns from their investments.
Conservative hybrid funds invest nearly 75% in debt instruments and around 25% in equity-related instruments like shares.
Who should opt for it? As the name suggests, these schemes are ideal for risk-averse, ultra-conservative investors looking for a slightly higher return potential than debt funds.
The fund invests heavily into equity securities (usually more than 75% of fund allocation) and the balance in debt instruments to offset the unpredictability of the market.
Who should opt for it? Aggressive hybrid schemes are suitable for aggressive investors looking to accumulate wealth over the long run.
This category can shift between equity and debt class asset based on the demands of the situation. Fund managers evaluate the market dynamics and rebalance the portfolio of top hybrid funds accordingly.
Who should opt for it? This is a good option for investors who want to follow market trends but don’t have the expertise or time to manage asset allocation.
These funds are a more conservative form of equity-oriented hybrid funds. As the name suggests, the asset allocation is fairly balanced between equity and debt. Balanced funds are known to generate decent returns from equity investments with low-risk thanks to the fixed income component that helps mitigate the market volatility.
Who should opt for it? These are ideal for moderately conservative investors who are looking for lesser risk quotient than equity-oriented hybrid funds.
Arbitrage funds capitalize on the differential price between the cash segment and the derivative market. Stock is picked at a lower price from the cash market and then sold at a higher price to generate alpha.
Who should opt for it? They are relatively safe because a part of the investment goes into fixed income instruments that ensure stable returns.
As you can see, hybrid schemes cater to varying levels of risk tolerance, be it conservative, moderate or aggressive. So, what are you waiting for? Now that you understand the equity-debt mix go ahead and nail the best hybrid mutual funds that are in sync with your risk profile, financial goals, and investment horizon.