Should you invest in hybrid funds? Find the answer here

Do you want to invest in both stocks and bonds? Are you looking for a balanced investment with the potential to offer inflation-beating returns? You may consider investing in hybrid funds. It puts your money in a combination of equity and fixed-income securities. Moreover, you have seven types of hybrid mutual funds, and you may choose a suitable investment to achieve your financial goals based on your risk appetite. Should you invest in hybrid funds?

What are hybrid funds?

You have hybrid funds investing predominantly in a combination of equity and debt securities. It diversifies your investment in more than one asset class and helps you build a diversified portfolio. You have seven types of hybrid mutual funds:

Aggressive Hybrid Fund: You have aggressive hybrid funds allocating 65%-80% of the fund’s assets towards equity and equity-related instruments. It distributes the remaining 20%-35% of the assets towards debt securities to offer stability to the portfolio. 

Conservative Hybrid Fund: You have conservative hybrid funds allocating 75%-90% of the fund’s assets towards debt instruments. It invests the remaining 10%-25% of the assets towards equity instruments in enhancing the overall portfolio return.

Balanced Hybrid Fund: You may find balanced hybrid funds investing a minimum of 40% and a maximum of 60% in either the debt or equity instruments. For instance, if a balanced hybrid fund invests 45% of its portfolio in equity, it must invest the remaining 55% of the portfolio in debt instruments. 

Equity Savings Fund: You have the equity savings fund balancing risk and return by investing the assets in a mix of equity, derivatives and debt securities. It invests 65%-100% of the assets in equity and equity-related securities and the remaining 0%-35% of the assets in debt instruments. 

Dynamic Asset Allocation Fund: You may find dynamic asset allocation funds shifting from a 100% investment in equity and equity-related instruments to a 100% allocation of the assets towards debt securities, depending on the market conditions. 

Multi-Asset Allocation Fund: You have multi-asset allocation funds investing in a minimum of three asset classes such as equity, debt and gold, with at least 10% of the allocation towards each of the asset classes. 

Arbitrage Fund: You have arbitrage funds following the arbitrage strategy of buying assets in the cash market and simultaneously selling them in the futures market. It helps you profit from the price differential between the cash market and the futures market. Moreover, the arbitrage fund invests 65%-100% of the assets towards equity and the remaining 0%-35% towards debt securities. 

Should you invest in hybrid funds?

You may consider investing in hybrid funds if this is your first time in the stock market. It invests in a mix of stocks and bonds and offers stability to your portfolio. You have seven types of hybrid funds, and you may select the investment depending on your investment goals, time horizon and risk tolerance.

You may choose an aggressive hybrid fund that invests a significant proportion of assets in equity instruments if you have a high-risk tolerance. However, you may select a conservative hybrid fund that invests mainly in debt securities if you have a low-risk appetite. 

You can invest in dynamic asset allocation funds to diversify your portfolio across debt and equity instruments. It can adjust the asset allocation depending on market conditions, reduce volatility, and offer you a risk-adjusted return. 

You may consider investing in multi-asset allocation funds if you seek exposure to multiple assets such as equity, debt, gold and real estate. It invests at least 10% in three asset classes which makes it less risky than other hybrid funds. 

You could invest in hybrid funds if you have an investment horizon of at least three years. Moreover, hybrid funds are taxed either as debt-oriented funds or equity-oriented funds. For instance, mutual funds with at least 65% of their equity and equity-related instruments are taxed as equity-oriented funds.

You may opt for hybrid funds to get tax-efficient returns compared to bank FD’s if you fall in the higher income tax brackets. In a nutshell, you can pick the hybrid fund depending on your income tax slab and risk profile to achieve your financial goals. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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