Understanding the Different Types of Hybrid Mutual Funds
Posted on 18-Jun-2024
6 min read
Hybrid mutual funds invest in more than one asset class. But of course, that’s not all about them. Read this comprehensive blog post by Shriram AMC for more information.
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If you have found yourself on this page, that can mean two things. Possibility A, you are quite a savvy investor who knows about the different kinds of mutual funds in India and wants to learn more. Possibility B, you are just starting out, and after learning about equity and debt funds, you now want to learn about hybrid funds.
So, we are going to take a balanced approach here and spill the dirt about the different types of hybrid mutual funds. And speaking of balanced, did you know that hybrid funds were once called “Balanced Mutual Funds” until SEBI decided that the name was misleading to investors and needed a change?
Yep, funds that invest in 75 per cent equity are anything but not balanced, right? Hence, SEBI changed the nomenclature to “Hybrid” mutual funds. What are they? Let’s find out!
What are Hybrid Mutual Funds?
Hybrid funds are a type of mutual fund that blends equity (stocks) and debt (bonds) investments in one package. Imagine a balanced portfolio - hybrid funds aim for that. They target different risk levels by varying the equity-debt mix. This offers capital appreciation potential from stocks and income stability from bonds. They can be suitable for investors seeking growth with some cushion against market dips and with risk tolerance ranging from conservative to aggressive.Think of it like this—you are interested in investing in mutual funds to build wealth (the obvious) but avoid exposure to risks as much as you can. This is where hybrid mutual funds save the day. They blend equity and debt funds to offer lower risk and greater diversification.
These funds cater to various risk profiles, with options ranging from conservative (debt-heavy) for income to aggressive (equity-heavy) for growth. The debt portion helps smooth out stock market volatility, while equities offer long-term growth potential.
Hybrid funds are a good fit for investors seeking a balance between growth and income generation, with options suitable for various financial goals and time horizons.
What Are the Features of a Hybrid Fund?
Let us now discuss some of the main characteristics of hybrid mutual funds:• Diversification: Hybrid funds offer built-in diversification, reducing overall portfolio risk compared to pure equity funds.
• Risk-Return Spectrum: These funds cater to various risk appetites, with options ranging from conservative (debt-heavy) to aggressive (equity-heavy).
• Potential for Capital Appreciation: The equity component allows for potential growth in the long term.
• Income Generation: Debt instruments can provide regular income payouts.
• Different Investment Combinations: Different hybrid mutual funds offer different investment combinations, like varying equity-debt ratios. This helps investors with different risk profiles choose the kind of hybrid fund they want for their financial goals.
Reasons to Invest in a Hybrid Fund
Of course, hybrid funds are a great way to generate long-term income and build wealth, as we have already discussed. But if you need a little more motivation to begin investing today, consider these reasons:• Suitable for Various Risk Profiles: Hybrid funds cater to a wide range of investors, from conservative to aggressive.
• Reduced Volatility: The debt component helps to dampen the volatility associated with equity markets.
• Potential for Steady Returns: Hybrid funds can offer a balance between growth and income generation.
• Long-Term Wealth Creation: They can be a good option for investors with long-term financial goals.
How Should You Invest in a Hybrid Mutual Fund?
You can either invest in the hybrid fund of your choice through the official Shriram AMC website or choose an intermediary you like. If you invest through us, here are the steps to begin:• Step 1: Set up your account. This involves registering, completing KYC (Know Your Customer) verification, and linking your bank account.
• Step 2: Pick your investment. Decide which type of hybrid fund you want to invest in.
• Step 3: Choose how to invest. Decide whether to invest a lump sum all at once or set up a Systematic Investment Plan (SIP) for regular contributions.
However, before you become all supercharged and dive right in, keep these pointers at the back of your mind:
• Assess Your Risk Tolerance: Identify your comfort level with market fluctuations.
• Investment Horizon: Consider your investment timeframe to choose a suitable fund.
• Financial Goals: Align your fund selection with your long-term financial goals.
• Research & Compare: Analyze different hybrid fund options before investing.
• Consult a Financial Advisor: Seek professional guidance for personalized advice.
Types of Hybrid Mutual Funds
There are seven main types of hybrid mutual funds categorized by SEBI (Securities and Exchange Board of India) based on their asset allocation. Let’s learn about them in detail:• Balanced Hybrid Funds: Invest in a balanced proportion of equity (40-60%) and debt (40-60%).
• Conservative Hybrid Funds: Primarily invest in debt instruments (75-90%) with a smaller allocation to equities (10-25%).
• Aggressive Hybrid Funds: Invest a majority of their assets in equities (65-80%) with a smaller allocation to debt (20-35%).
• Equity Savings Funds: Invest a minimum of 65% in equities and offer tax benefits similar to Equity Linked Savings Schemes (ELSS).
• Arbitrage Funds: Exploit price discrepancies between equity cash and derivatives markets for short-term gains.
• Dynamic Asset Allocation Funds: The fund manager actively adjusts the equity-debt ratio based on market conditions.
• Multi Asset Allocation Funds: Invest in a broader range of asset classes beyond equity and debt, potentially including gold and real estate investment trusts (REITs).
How Does a Hybrid Mutual Fund Work?
For investors who want to have a more hands-on approach to picking and managing funds, it is imperative they understand how hybrid funds work.The fund manager allocates the corpus (pooled money) of the hybrid fund into various equity and debt instruments based on the fund's investment objective. The returns are generated through a combination of capital appreciation from equities, interest income from debt, and potential arbitrage opportunities in certain funds.
What Are the Taxation Rules of Hybrid Mutual Funds?
The tax treatment of hybrid funds depends on the investment type:• Equity Portion: Short-term capital gains are taxed at 15 per cent, while long-term capital gains exceeding Rs. 1 lakh are taxed at 10% without indexation.
• Debt Portion: The debt component of hybrid funds is taxed like all other pure debt funds. The short-term capital gains are added to your income and taxed as per your income tax slab. The long-term capital gains are taxed at 20 per cent with indexation benefit and 10 per cent without indexation.
Conclusion
Hybrid mutual funds offer a compelling option for investors seeking a balance between growth and stability. By understanding the different types of hybrid funds and their risk-return profiles, you can make informed investment decisions aligned with your financial goals. Remember, consulting a financial advisor or a reputed asset management company like Shriram AMC, can be beneficial for personalized investment guidance.FAQs
Here are some commonly asked questions about hybrid mutual funds in India:1. Are hybrid funds right for me?
Hybrid funds can be a good fit for a variety of investors. If you:
• Prefer a balance between growth and stability: Hybrid funds offer a mix of equity and debt, catering to moderate risk profiles.
• Have a medium to long-term investment horizon: These funds are well-suited for goals 3-5 years or more in the future.
• Want to manage portfolio volatility: The debt component helps to reduce the impact of stock market fluctuations.
2. How much should I invest in a hybrid fund?
There's no one-size-fits-all answer. Consider your:
• Risk tolerance: Allocate more to debt if you're conservative, and vice versa.
• Investment goals: Match your fund choice to your goals (retirement, child's education, etc.).
• Overall portfolio diversification: Hybrid funds can complement pure equity or debt investments.
3. Can hybrid funds generate regular income?
Some hybrid funds, particularly debt-heavy conservative options, may provide regular dividend payouts. However, this isn't guaranteed, and income generation depends on the fund's investment strategy.
4. Are hybrid funds better than equity or debt funds?
There's no "better" option; it depends on your goals and risk tolerance.
• Equity Funds: Offer potentially higher returns but with greater volatility.
• Debt Funds: Provide stability and regular income, but growth potential is typically lower.
• Hybrid Funds: Strike a balance between the two, offering a mix of growth and stability depending on the fund type.
5. What are exit loads for hybrid mutual funds?
Hybrid funds, like other mutual funds, may have exit loads for redemptions within a specific lock-in period (usually short-term). Exit loads discourage frequent withdrawals and encourage long-term investing.
6. How do hybrid mutual funds manage risk?
Hybrid funds employ diversification by investing in both equity and debt. The debt portion helps to mitigate the risk associated with equity market fluctuations. Additionally, some funds like dynamic asset allocation funds may adjust their equity-debt ratio based on market conditions to manage risk.
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