Life
General
Claims
Resources
Simplifying Life Insurance in India
What are Hybrid Mutual Funds & Who Should Invest?
Hybrid funds are a type of mutual fund where money is invested in two or more asset classes, including debt and equity. The main philosophies behind such funds are diversification and asset allocation.
Depending upon the proportion of investment in each asset class and the scheme’s objective, hybrid funds are of various types. To help you choose the right scheme, we have covered the necessary details regarding hybrid mutual funds.
Table of Contents
What is the Meaning of Hybrid Funds?
The meaning of the hybrid fund is inlaid in its name. The portfolio of this type of mutual fund scheme comprises a prudent mix of financial instruments to achieve diversification. This, in turn, mitigates investment risk. Fund managers of hybrid schemes vary the proportion of investment in debt/equity or any other asset class to fulfill the fund’s objective.
After knowing what a hybrid mutual fund is, individuals need to become familiar with its working process.
How Does a Hybrid Fund Work?
As noted above, hybrid funds allocate their pooled funds to both equity and debt instruments. Accordingly, these schemes can provide investors with the best of both avenues. The equity exposure can generate high returns, but the associated financial risk is high. At the same time, the debt instruments in the portfolio provide stability, thus mitigating the investment risk.
Fund managers of these schemes maintain a prudent mix of equity and debt to fulfill the objective of the fund.
What are the Types of Hybrid Funds?
The different types of hybrid funds are as follows:
Hybrid fund types help make an investor's investment portfolio diverse and enjoy the best result of the investment.
Benefits of Investing in Hybrid Funds
Here are some benefits of investing in hybrid funds:
1. Active management of portfolio ris
Such mutual fund schemes ensure active management of financial risk via diversification as well as asset allocation.
2. Suitable for different risk profiles
Investors can choose a hybrid fund that is suitable for their risk profile. For example, individuals who have high risk-bearing ability might want to consider investing in aggressive hybrid funds. Whereas individuals with a low-risk appetite find conservative funds to be a suitable option.
3. Diversification
These funds provide diversification across different asset classes and their subclasses. For example, the equity portion of the portfolio may include small-cap, mid-cap, and large-cap stocks.
4. Active rebalancing
Fund managers of these funds rebalance the portfolio according to the changing market conditions to generate returns for investors. Note that they take all buy-and-sell decisions considering the scheme’s objective.
Who Should Invest in Hybrid Funds?
Hybrid funds are safer than equity funds but riskier than debt funds. Accordingly, these are suitable for investors who are seeking higher returns than debt mutual fund schemes. That said, note that the risk-reward ratio depends on the proportion of investment in equity and debt.
In case investors want to safeguard their portfolio value from market volatility, they might consider allocating funds to a debt fund scheme that allocates a higher percentage of its assets to debt securities.
How to Invest in Hybrid Funds?
After selecting a hybrid fund to invest in, individuals must decide whether to opt for a direct plan or a regular plan. The former is offered by fund houses directly. That said, in the case of the latter, individuals need to route their investments via a broker or distributor. One can follow these steps to invest via an AMC’s website:
Step 1
Go to the AMC website and create an account.
Step 2
Fill out the form and complete the KYC by providing the necessary details.
Step 3
Select the hybrid fund you want to invest in.
Step 4
Choose the investment mode (SIP/lumpsum) and complete the payment.
Factors to Consider Before Investing in Hybrid Funds
Here are some aspects to consider before investing in hybrid funds:
1. Risk Factor
The risk factor primarily depends on the percentage of equity holding. Since the risk-bearing capacity of all investors is not identical, it is vital to check the portfolio constituents before investing.
2. Past Returns
A Return is not guaranteed in the case of hybrid funds. For investors, it is key to check the past returns of a scheme before investing as it gives an idea regarding the scheme’s consistency in terms of performance. However, note that past returns are not an indicator of a scheme’s future performance.
3. Cost
Hybrid mutual funds impose an annual fee on investors known as an expense ratio, to cover the cost of running the fund. When comparing different hybrid schemes, investors might want to consider this aspect before making a decision. After all, this yearly fee has an impact on their returns.
4. Investment Horizon
Investors must decide their investment time horizon when investing in a hybrid fund. It refers to the time period for which they’ll stay invested in a scheme. Note that there is no ideal duration for such investments. Individuals may want to hold their units for as long as possible to benefit from the power of compounding.
5. Financial Goals
Financial goals vary from one individual to another. Before investing in any hybrid fund, make sure that the investment objective of the fund is in line with your requirements.
6. Tax on Gains
Hybrid funds that invest a minimum of 65% of their fund corpus in the equity asset class are taxed as equity funds. This means that if investors redeem their units before the completion of 1 year from the purchase date, they earn short-term capital gains (STCG). A flat tax rate of 20% is applicable on such returns. However, if investors sell their units after 1 year, they earn long-term capital gains (LTCG), which attract a 12.5% tax.
Remember, no tax is applicable on LTCG of not more than Rs. 1 lakh.
On the other hand, hybrid funds investing a minimum of 65% of their financial assets in debt instruments are taxed as debt funds. Accordingly, if individuals sell his/her units before 3 years from the date of purchase, they earn short-term capital gains. The realized gains are taxed according to the slab rate that is applicable.
Upon redemption of units after 3 years, long-term capital gains (LTCG) are earned by investors. A tax rate of 20% is applicable for such gains. Furthermore, investors are eligible for indexation benefits.
Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.
We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.
FAQs about Hybrid Funds
Can hybrid funds provide higher returns than bank fixed deposits?
What is the main objective of conservative hybrid funds?
Why do hybrid funds invest in a combination of equity and debt?
Do open-ended hybrid funds come with a lock-in period?
What are Hybrid funds?
Are hybrid funds tax-free?
Other Important Articles about Mutual Funds
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
Latest News
Read More
Renew & Download Policy Document, Check Challan, Credit Score, PUC & more
Anytime, Anywhere. Only on Digit App!
Rated App
Rated App
Scan to Download
