If you are someone who wants to reap the benefits of both equity and debt instruments, worry not - you totally can! As the name suggests, hybrid funds offer the best of both worlds to help you achieve your investment goals and help in long-term wealth creation. In this case, the fund manager allocates your money in different proportions in both equity and debt-based instruments based on the objective of the fund. In a nutshell, the fund manager buys or sells securities in accordance with market fluctuations.
Who should invest in these funds?
Most of us know how equity funds are suitable for aggressive investors with a high risk appetite, while debt funds are favoured by conservative. Those investors who want to invest in equity markets can go for hybrid funds, since strike a perfect balance between good returns and a safety net. This is because while the equity component helps to reap high returns, the debt component provides stability. Thanks to hybrid funds, you can get stable returns even when the market is experiencing some turbulence. For some investors who are not as conservative, the dynamic asset allocation feature can be fully utilised to get the best of market fluctuations.
Types of hybrid funds
It is also important to understand the types of hybrid funds, based on their asset allocation:
These are funds, wherein a fund manager allocates 65% or more of the assets in equity, while the remaining are invested in debt and money-market instruments. The fund comprises equity shares of companies in several sectors - FMCG, healthcare, finance, real estate etc.
The debt component of the fund constitutes investment in government securities, debentures, bonds and treasury bills. In this case, an asset allocation of 60% or more is invested in debt and the rest in equity. For the sake of liquidity, a part of the fund can also be invested in cash or cash equivalents.
As the name suggests, balanced funds invest a minimum of 65% in equity and equity-oriented instruments. This makes them equity-oriented when it comes to taxation. In addition, gains over Rs 1 lakh from balanced funds that are held for over a year are taxable at the rate of 10%. The remaining assets are invested in debt securities and cash reserves - this makes it favourable for risk-averse investors.
These hybrid funds mainly invest in debt instruments and has about 15-20% exposure to equities. This also means that an investor gets the opportunity to earn higher returns than regular debt funds. Monthly Income Plans provide regular income to the investor through dividends, which can have a certain frequency - be it monthly, quarterly, half-yearly or even annually. In addition, they also come with a growth option, which means they let the investments grow in the fund’s corpus.
In the case of arbitrage funds, the fund manager tries and maximises returns by buying a certain stock at a lower price in one market. Later, he sells it at a higher price in another market. Remember, these are opportunities that are not easily available. When these opportunities are not available, the funds stick to debt instruments or cash. These funds are quite safe, just lke debt funds, but long-term capital gains are taxable just like an equity fund.
Points to remember for an investor
Here’s what an investor needs to remember:
The bottomline
If you are someone who is risk-averse and wants to enjoy the benefits of both equity and debt, then it is a great idea to invest in hybrid funds. Additionally, it is important to keep your goals, risk appetite and investment horizon in mind.