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A hybrid or balanced mutual fund is a type of mutual fund which invests across both equity and fixed-income securities. If you are looking to balance your risk-reward ratio, you may consider investing in a hybrid fund. We have covered the following in this article on how to pick the right hybrid fund:
As the name suggests, hybrid funds have their portfolios constituted in such a way that it includes both equity-linked and fixed-income securities across both debt and money markets. By investing in the right hybrid fund, you will gain a measured exposure to equity and debt markets, which help you get the best out of both by balancing the risk-reward ratio.
The following are the types of hybrid funds:
This type of hybrid fund invests at least 40% of its portfolio in debt and equity-linked securities. The main intention of balanced hybrid funds is to generate returns in long-term capital gains for investors. The exposure of a minimum of 40% towards equity and fixed-income securities ensures that the fund balances the risk-reward ratio.
As the name suggests, these funds invest in a minimum of three different asset classes. The exposure towards three different asset classes exceeds 10%. If you are looking to diversify your portfolio across asset classes, then multi-asset allocation funds are an excellent choice.
As the name suggests, the asset allocation of an aggressive hybrid fund is made so that equity-linked securities dominate their portfolio. These funds invest at least 65% of their portfolio in equities while capped at 80%. Fixed-income securities constitute the remainder of the portfolio across debt and money markets.
Dynamic asset allocation funds are also referred to as balanced advantage funds. This type of hybrid funds can move their asset allocation from 100% equities to 100% debt, depending on the market and economic developments. The fund manager and his team of market researchers and analysts continually look for opportunities to generate maximum returns for investors. If you want to follow the market trend and benefit from it, you may consider investing in dynamic asset allocation funds.
As the name suggests, the equity exposure of conservative hybrid funds is limited to preserving investors’ capital. The equity exposure of these funds is in the range of 10% to 25%, while 75% to 90% of the asset allocation is made towards fixed-income securities across debt and money markets. These funds’ primary objective is to create income from debt securities and spike the returns through equity exposure.
Equity savings funds intend to strike the right balance between risk and return through investing in debt securities, derivatives and equities. The diverse nature of these funds’ portfolio ensures that market volatility has no significant impact on the fund’s performance. The funds’ equity exposure provides the much-needed push for growth, and debt and derivatives exposure gives stability. The asset allocation of these funds is made so that at least 65% of the portfolio consists of equity and equity-linked securities. In contrast, fixed-income securities make up the remainder of the portfolio.
The following are some of the factors that must be considered while picking a hybrid mutual fund:
Knowing the equity exposure of the fund under consideration is important. You have to assess your risk tolerance level and ensure to pick only those funds whose risk levels are in sync with your requirements and risk profile.
The thumb rule to decide your equity exposure is 100 minus your age. For instance, if you are aged 35 years, then as per this rule, your equity exposure should be (100 – 35)% = 65% of your portfolio. In case you are ready to bear higher levels of risk, you may consider aggressive hybrid funds.
It is essential to understand the way the fund under consideration is going to be taxed. The taxation of a hybrid fund depends on equity exposure. If a hybrid fund’s equity exposure exceeds 65%, it is taxed like an equity fund. If not, then the rules of taxation of debt funds apply. If you are not aware of how your hybrid fund investments are going to be taxed, you might be up for an unpleasant surprise.
If you have a longer investment horizon, say five years or longer, you may consider investing in equity dominated hybrid fund. Likewise, if you have a short investment tenure, you may go ahead with a debt dominated hybrid fund.
You have to ensure that you invest in the right hybrid fund, which is in sync with your risk tolerance levels, goals, and investment horizon. Investing in a hybrid fund is a better way of diversifying your portfolio as you get exposure to equity and debt securities.