1. What is a Hybrid Fund?
Hybrid funds invest in both debt instruments and equities to achieve maximum diversification and assured returns. A perfect blend! The choice of hybrid fund depends on your risk preferences and investment objective.
2. How do Hybrid Funds work?
Hybrid funds aim to achieve wealth appreciation in the long-run and generate income in the short-run via a balanced portfolio. The fund manager allocates your money in varying proportions in equity and debt based on investment objective of the fund. The fund manager may buy/sell securities to take advantage of market movements.
3. Who should invest in Hybrid Funds?
Hybrid funds are regarded as safer bets than pure equity funds. These provide higher returns than pure debt funds and are a favourite among conservative investors. Budding investors who are eager to take exposure in equity markets can think of hybrid funds as the first step. As these are an ideal blend of equity and debt, the equity component helps to ride the equity wave.
At the same time, the debt component of the fund provides a cushion against extreme market turbulence. In that way, you receive stable returns instead of a total burnout that might be possible in case of pure equity funds. For the less conservative category of investors, the dynamic asset allocation feature of some hybrid funds becomes a great way to milk the maximum out of market fluctuations.
3. Types of Hybrid Funds
Hybrid funds can be differentiated as per their asset allocation. Some types of hybrid funds have a higher equity allocation while others allocate more to debt. Let’s have a look in detail.
a. Equity-oriented hybrid funds
When the fund manager invests 65% or more of the fund’s assets in equity and rest in debt and money market instruments, it’s called an equity-oriented fund. The equity component of the fund comprises of equity shares of companies across industries like FMCG, finance, healthcare, real estate, automobile, etc.
b. Debt-oriented balanced funds
The debt component of the fund constitutes the investment in fixed-income havens like government securities, debentures, bonds, treasury bills etc. An asset allocation of 60% or more in debt and rest in equity is called a debt-oriented fund. For the sake of liquidity, some part of the fund would also be invested in cash and cash equivalents.
c. Balanced Funds
Balanced funds invest at least 65% of their portfolio in equity and equity-oriented instruments. This allows them to qualify as equity funds for the purpose of taxation. It means that gains over and above Rs 1 lakh from balanced funds held for a period of over 1 year are taxable at the rate of 10%.
The rest of the fund’s assets goes to debt securities and cash reserves. So, conservative investors can benefit from the return-earning capacity of equities without taking too many risks. The fixed income exposure of balanced funds helps in mitigating equity-related risks.
d. Monthly Income Plans
These are hybrid funds that invest predominantly in debt instruments. A monthly income plan (MIP) would generally have 15-20% exposure to equities. This would allow it to generate higher returns than regular debt funds. MIPs provide regular income to the investor in the form of dividends. An investor can choose the frequency of dividends, which can be monthly, quarterly, half-yearly or annually.
MIPs also come with the growth option – they let the investments grow in the fund’s corpus. Hence, an MIP is not a mere monthly income investment. Do not let the name mislead you. They are actually hybrid funds that invest mostly in debt and some amount of equities.
e. Arbitrage Funds
An Arbitrage fund manager tries to maximize returns by buying the stock at a lower price in one market. He, then, sells it at a higher price in another market.
However, arbitrage opportunities are not always available easily. In the absence of arbitrage opportunities, these funds might stick to debt instruments or cash. By design, arbitrage funds are relatively safer like most debt funds. But its long-term capital gains are taxable like that of any equity fund.
4. Things an Investor should consider
a. Risk factor
It would be unwise to assume hybrid funds to be completely risk-free. Any instrument which invests in equity markets will have some kind of risk. It might be less risky than pure equity funds but you need to exercise caution and portfolio rebalancing regularly.
Hybrid funds don’t offer guaranteed returns. The performance of underlying securities affect Net Asset Value (NAV) of these funds. So, it may fluctuate due to market movements. Moreover, these might not declare dividends during market downturns.
Hybrid funds would charge a fee for managing your portfolio which is known as the expense ratio. Before investing in a hybrid fund, ensure it has a low expense ratio than other competing funds. This translates into higher take-home returns for the investor.
d. Investment Horizon
Hybrid funds may be ideal for a medium-term investment horizon of say 5 yrs. If you want to earn a risk-free rate of return, you may go for arbitrage funds. They bet on price differentials of securities in different markets.
e. Financial Goals
You can meet intermediate financial goals like buying a car or funding higher education with hybrid funds. Retirees too invest in balanced funds and go for a dividend option to supplement their post-retirement income.
f. Tax on Gains
The equity component of hybrid funds is taxed like equity funds. Long-term capital gains in excess of Rs 1 lakh on equity component are taxed at the rate of 10%. Short-term capital gains (STCG) on equity component are taxed at the rate of 15%.
The debt component of hybrid funds is taxable as any other debt fund. You must add these gains to your income and taxed as per your income slab. LTCG from debt component is taxable at 20% after indexation and 10% without the benefit of indexation.
5. How to Invest in Hybrid Funds?
You can invest in Hybrid Funds in a paperless and hassle-free manner at ClearTax. Using the following steps, you can start your investment journey:
1: Sign up for an account at cleartax.in
2: You need to enter your details like the amount of investment and investment period
3: Get your e-KYC done in less than 5 minutes
4: Invest in your favourite hybrid fund from amongst the hand-picked mutual funds
6. Top 5 Hybrid Funds in India
While selecting a fund, you need to analyse the fund from different angles. There are various quantitative and qualitative parameters that can tell you which is the best hybrid fund that will suit you. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top 5 balanced funds in India based on the past 5 year returns. Investors may choose the funds based on a different investment horizon like 10 years returns. You may include other criteria like financial ratios as well.
|Fund Name||1 year||3 year||5 year|
|Tata Retirement Savings Fund - Moderate Plan||14.95||11.68||20.87|
|HDFC Balanced Fund||11.21||10.51||19.42|
|L&T India Prudence Fund||10.71||10.19||19.2|
|Principal Balanced Fund||17.97||13.57||18.35|
|ICICI Prudential Balanced Fund||8.93||10.55||18.31|
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.