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Business

Factors To Consider Before Investing In Hybrid Mutual Funds

By Moss Parker

Mutual funds in India have become a popular way for Indians to grow their wealth, with various types of funds catering to different risk appetites and financial goals. Among these, hybrid mutual funds stand out as a balanced investment option. But before diving into these funds, it’s crucial to understand what they are and the factors to consider. This blog explores what is hybrid fund, its types, and what you must know before investing.

What is a Hybrid Fund?

A hybrid fund, also referred to as a balanced fund, is a type of mutual fund that strategically invests in a blend of asset classes, typically equities (stocks) and debt (bonds). This unique blend aims to offer the best of both worlds: the growth potential of equities and the stability of debt. By diversifying across these asset classes, hybrid funds are designed to effectively manage risks while striving for better returns than pure debt funds, instilling confidence in potential investors.

Hybrid Fund Types

Hybrid funds are classified depending on their asset allocation. Few allocate more to equity, while others focus on debt. Let’s explore the different types in detail.

Equity-oriented

These funds invest over 65% of their assets in equity, with the remaining portion in debt and money market instruments. The equity component includes shares of companies across various industries like finance, healthcare, FMCG, real estate, and automobile sectors.

Debt-oriented balanced funds

These hybrid funds allocate over 65% of their assets to debt instruments. The debt component comprises investments in fixed-income securities like government, debentures, bonds, and treasury bills. A portion of the fund is also invested in cash and cash equivalents to maintain liquidity.

Monthly Income Plans (MIPs)

MIPs are hybrid funds that primarily invest in debt instruments but have a 15-20% exposure to equities, allowing for higher returns compared to regular debt funds. They provide regular income to investors through dividends, which can be paid monthly, quarterly, half-yearly, or annually. They also offer a growth option, where investments grow within the fund’s corpus. Despite their name, MIPs are not small monthly income investments but hybrid funds with a significant debt component and some equity exposure.

Arbitrage Funds

These funds aim to maximise returns by buying stocks at lower prices in one market and selling them at higher prices in another. Since arbitrage opportunities may not always be available, these funds can invest in debt instruments or cash when needed. Arbitrage funds are relatively safer, similar to most debt funds. Still, their long-term capital gains are taxed like equity funds.

Things You Must Consider as an Investor Before Investing in Hybrid Mutual Funds

  • Risk Factor: Hybrid funds should not be perceived as completely risk-free. Any investment in equity markets carries inherent risks. While hybrid funds may be less risky than pure equity funds, exercising caution and regularly rebalancing your portfolio is essential.
  • Return: Hybrid funds do not guarantee returns. Their net Asset Value (NAV) is influenced by the performance of underlying securities, causing fluctuations due to market movements.
  • Cost: Hybrid funds charge a management fee, known as the expense ratio. Before investing, it’s prudent to choose a fund with a lower expense ratio than others, as this can result in higher returns for investors.
  • Investment Horizon: Hybrid funds are typically suited for a medium-term investment horizon, such as five years. Arbitrage funds are an option for those seeking a relatively risk-free return, as they capitalise on price differentials between securities in different markets.
  • Financial Goals: Hybrid funds can help achieve intermediate financial goals, like funding higher education or buying a car. Retired investors often invest in balanced funds and choose dividends to increase their income after retirement.
  • Tax on Gains: The equity part of hybrid funds is taxed just like the equity funds. Long-term capital gains (LTCG) exceeding Rs.1 lakh are taxed 10%, while short-term capital gains (STCG) are taxed 15%. The debt component is taxed per regular debt funds, with LTCG taxed at 20% with indexation benefit and 10% without indexation.

Conclusion

Hybrid mutual funds offer a balanced investment approach, making them an attractive option for many investors in India. By understanding hybrid funds and considering factors before investing, you can make an informed decision that aligns with your financial objectives.

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