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Investing in hybrid/balanced mutual funds is the best way to diversify your investment portfolio. These mutual funds invest across both debt and equity instruments. It is for this reason that investors get the benefit of realising maximum returns from both segments. Hybrid funds ensure capital appreciation and fight against the potential risk at the same time. This article covers the following:
Balanced or hybrid mutual funds are a one-stop investment option offering exposure to both equity and debt segments. The main intention of hybrid funds is to balance the ratio of risk-reward and optimising the return on investment. Top hybrid mutual funds invest about 50% to 70% of the portfolio in equities and the rest in debt instruments.
If the equity exposure of a hybrid fund exceeds 65%, then it is considered as an equity-oriented hybrid fund. If not, it is regarded as a debt-oriented hybrid fund. First-time equity investors may consider hybrid mutual funds as a viable option. Balanced funds are an excellent option for those who want maximum capital appreciation while taking some amount of risk.
The table below shows the best-performing hybrid of balanced funds based on the last 3-year and 5-year returns:
The portfolio of a hybrid fund is constituted by including securities across both equity and debt segments. Therefore, anyone looking to get exposure towards a balanced portfolio may consider investing in this fund. The fund managers of hybrid funds try to balance the risk-reward ratio. Hence, investors looking to diversify their portfolio may consider investing in these funds.
However, these funds are exposed to all the risks that any equity fund is exposed to. Therefore, investors must be willing to assume these risks by investing in hybrid mutual funds. The main benefit of investing in these funds is that your portfolio gets diversified as the fund invests across both equity and debt securities.
The dividends offered by any mutual fund are now added to your overall income and taxed at your income tax slab rate. The rate of taxation of capital gains offered by hybrid funds depends on the equity exposure of the fund.
If the equity exposure exceeds 65%, then the fund is taxed like any other equity fund plan. Short-term capital gains (gains realised on selling equity fund units within one year of holding) are taxable at the rate of 15%. Long-term capital gains of up to Rs 1 lakh a year are made tax-exempt. Any gains exceeding this limit are taxed at 10%, and there is no benefit of indexation provided.
If the equity exposure of the fund is less than 65%, then the rules of taxation of debt funds apply. Short-term capital gains (gains realised on redeeming debt fund units within a holding period of three years) are added to your overall income and taxed at the income slab rate you fall under. Long-term capital gains are taxed at a rate of 20% after indexation.
Since the hybrid funds invest across both equity and debt instruments, they necessarily carry all the risks that both equity and debt instruments possess. The equity instruments in the portfolio of hybrid funds come attached with the following risks; volatility risk, market risk and concentration risk. The debt instruments in the portfolio of a hybrid fund carry the following risk; credit risk and interest rate risk.
Best balanced mutual funds offer diversification in the form of a single mutual fund. Hence, investors need to analyse and select a bouquet of the right funds carefully. A fund manager can do this job for investors. A strategic mix of debt with equity components make balanced funds less vulnerable to market volatility. Equity components of the fund can generate good returns which helps capital appreciation, while debt components shield the investment from market volatility.
If you are looking to invest in hybrid funds, you should understand that these funds have some exposure to equities. Therefore, you have to be willing to assume all the risks that come associated with equity and equity-linked instruments. As mentioned earlier, hybrid funds are further classified as equity-oriented and debt-oriented hybrid funds.
Therefore, you have to check for the equity exposure of the hybrid fund you are considering to investing in. Conservative investors may consider investing in debt-oriented funds while slightly aggressive investors may go with equity-oriented funds. Also, ensure that you are aware of the kind of hybrid fund you are investing in; this helps you plan your taxes better