A Mutual Fund in itself offers diversification when compared to pure equities. However, hybrid funds are a type of mutual fund that offers diversification across asset classes. These funds invest in both equity and debt instruments. It helps investors realize benefits from both the segments. The main motto of hybrid funds is to balance the risk-reward ratio and optimize return on investment.
Mostly, hybrid mutual funds are equity-oriented. The best hybrid funds invest around 50% to 70% in equity & equity related instruments and the remaining in fixed income instruments. This asset allocation helps in churning good returns for its investors.
These funds are suitable for investors seeking good returns at a lesser risk than pure equity funds. For capital appreciation and monthly income one can invest in Hybrid Funds. Monthly dividend schemes of hybrid funds are popular among investors.
Best hybrid mutual funds aim for wealth appreciation in the long term. Also, they aim to generate income in the short term through a balanced portfolio. The fund manager allocates the portfolio assets in varying proportions across debt and equity to achieve the fund’s investment objective. To take advantage of the market movements, the fund manager buys and sells securities.
Additionally, the choice of these funds primarily depends on the investor’s financial goal (investment objective) and risk preferences.
Types of Hybrid Funds
In 2017, SEBI had re-categorized mutual fund schemes to improve uniformity across the mutual funds’ industry. It also enables the investor to evaluate and compare different schemes. Hybrid Schemes is one of the broadly classified schemes. Within hybrid funds, the following are its types.
1. Conservative Hybrid Mutual Funds
It is an open-ended hybrid scheme that predominantly invests in debt instruments. This type of hybrid fund can invest a total of 75%-90% of its assets in debt instruments and 10%-25% of its assets in equity and equity-related instruments. Since this fund predominantly invests in fixed income securities, it suits investors with 2-3 years investment horizon. For the purpose of taxation, they are considered as debt funds.
2. Balanced Hybrid Mutual Funds
It is an open-ended balanced scheme that invests in both equity and debt securities. It can invest a maximum of 40%-60% in equity and equity-related instruments and 40%-60% in debt instruments. The scheme is ideal for an investment horizon above three years. Their taxation is similar to debt funds.
3. Aggressive Hybrid Mutual Funds
It is an open-ended equity hybrid fund in India that predominantly invests in equity and equity-related instruments. The scheme can invest 65%-80% of its assets in equities and 20%-35% in debt securities. It is ideal for an investment horizon above three years. For the purpose of taxation, they are considered as equity funds.
4. Dynamic Asset Allocation Funds or Balanced Advantage Funds
It is an open-ended dynamic asset allocation fund. This type of hybrid fund balances its asset allocation between equity and debt based on market situations. This balanced advantage fund books profit when markets rise and invest more during a correction. It is suitable for an investment horizon above three years. Their taxation is similar to equity funds.
5. Multi-Asset Allocation Funds
It is an open-ended scheme investing in multiple asset classes. Multi-asset allocation funds can invest in a minimum of 10% of its assets in 3 asset classes. This hybrid mutual fund scheme is diversified when compared to other hybrid funds as the investment is spread out to multiple asset classes. It is ideal for investors who want to invest for a three-year horizon.
6. Arbitrage Funds
It is an open-ended equity hybrid fund in India investing in arbitrage opportunities. Arbitrage funds can invest a minimum of 65% of its assets in equities. This hybrid mutual fund scheme follows arbitrage strategies to maximize returns. It tries to capitalize on inefficient markets. It is suitable for investors who want to invest for a horizon of 1-3 years.
7. Equity Savings Funds
It is an open-ended scheme investing in equity, debt, and arbitrage opportunities in the market. Equity savings scheme can invest a minimum of 65% of its assets in equities and 10% of its assets in debt securities. The ideal investment horizon for this is 2-3 years. For the purpose of taxation, they are considered as equity funds.
Advantages of Investing in Hybrid Funds
Hybrid funds are considered a safer option when compared to pure equity funds. Therefore, investors who want to have some equity exposure can invest in them. The equity portion helps in earning significant returns with capital appreciation, while the debt portion shields the investment against market fluctuations. These funds are not entirely risk-free (like government-backed schemes). However, they manage to offer good returns to investors.
Following are the advantages of investing in Hybrid Funds:
Hybrid Funds offer the right mix of diversification through their investment portfolio. The fund’s asset allocation is well balanced between equity and debt instruments.
2. Suitable for all types of Investors
Hybrid funds suit a new investor who is scared of the equity market, a retiree looking for regular income, or an investor looking for high returns with some cushion. Investors inclined towards equity can invest in Aggressive Hybrid Funds, whereas, risk-averse investors can opt for Conservative Hybrid Funds.
3. Dual Benefits
Hybrid funds provide dual benefits of long-term growth from equity and stability from debt. A right balance between the equity and debt portion will help the portfolio churn good returns. And, the best hybrid funds offer just that.
4. Allows lump sums and SIP investments
The fund house allows investors to invest either through lump sum route or SIP route. Lump-sum investments enable the investor to invest the desired amount in one shot. While the Systematic Investment Plan (SIP) enables investors to invest a specified amount regularly. SIP investments help in averaging out the risk and work well in the long term. Investors can calculate their potential SIP returns using the Scripbox SIP calculator. This SIP calculator is available online and free to use. The investors can compute their potential SIP returns accurately.
The fund house also offers a direct plan and a regular plan for every fund for investors to choose from.
To sum up, portfolio diversification, right asset allocation, and active risk management are the reasons why many investors choose the best hybrid mutual funds.
Since these funds invest in both equities and debt securities, their tax treatment depends on the asset allocation of the funds. All hybrid funds with an exposure of 65% or more to equities are treated as equity funds. And the rest as debt funds.
For mutual fund schemes, the holding period of investments is very important for tax purposes.
Equity Hybrid Mutual Funds
For equity hybrid funds, if the investor’s holding period is less than one year, then it is a short term investment. And the gains arising out of it are Short Term Capital Gains (STCG). These are taxable at 15% per annum (plus 4% cess).
If the investor’s holding period is more than one year, then it is a long term investment. And the gains arising out of it are LongTerm Capital Gains (LTCG). These are taxable at 10% per annum (plus 4% cess), only if the gains are above INR 1 lakh.
Debt Mutual Funds
If the investor’s holding period is less than three years, it is a short term investment. And the Short Term Capital Gains (STCG) are taxable as per the income tax slab rate (plus 4% cess).
For investments beyond three years, the LongTerm Capital Gains (LTCG) are taxable at 20% with indexation benefit.
Additionally, there is a Dividend Distribution Tax (DDT) on dividend funds. From April 1st, 2020, dividends are taxable in the hands of investors. Dividends are taxable according to the income tax slab rate. A 10% TDS is cut for dividends above INR 5,000.
Additionally, equity mutual funds are subject to securities transaction tax is 0.001% if investors sell their holdings.
Who Should Invest in?
Hybrid or Balanced funds are comparatively safer investment options than pure equity funds. However, they are slightly riskier in comparison to pure debt funds. Also, these funds generate higher returns when compared to debt funds. Hence are most popular among conservative investors. Due to the equity exposure in the portfolio, conservative investors can invest in these funds to realize their long term goals.
- The equity presence in the portfolio helps in generating a high return, while the debt exposure acts as a cushion against extreme market volatility. The debt instruments’ exposure ensures stable returns.
- Investors who have been investing for a while can also choose to invest in the best hybrid mutual funds. These funds offer diversification to an investor’s portfolio.
- The variety of hybrid funds attract diverse investors. The debt oriented schemes are good options for investors looking for monthly income. The arbitrage schemes are low-risk alternatives among the equity-oriented schemes.
Therefore, best hybrid funds can be a choice for investment for either first-time or conservative investors or investors seeking diversification.