Investing in mutual funds is a popular way of growing your money and creating wealth over the long term. Hybrid mutual funds offer the benefits of both equity and debt funds. They aim to provide investors with the potential for higher returns and stability through a diversified portfolio of stocks, bonds, and other fixed-income securities.
There are various types and sizes of hybrid funds. Fund categories, including Equity Savings Funds, Balanced Advantage Funds, Aggressive Hybrid Funds, etc., come in many sizes. Then there are fund sizes, with allocations to equities ranging from 20% to 80%.
All of this can lead to confusion. Therefore, we will talk about the main hybrid fund categories in this blog to help you make a sound decision.
Types of hybrid mutual funds
Balanced hybrid funds
At least 40% of the portfolio of a hybrid fund of this sort is invested in debt- and equity-linked instruments. The primary goal of balanced hybrid funds is to provide investors with returns in the form of long-term capital gains. The fund balances the risk-reward ratio with exposure to equity and fixed-income securities of at least 40%.
Multi-asset allocation funds
As their name suggests, these funds invest in at least three different asset types. Over 10% of the portfolio is allocated to three different asset types. Multi-asset allocation funds are a great option if you want to diversify the asset classes in your portfolio.
Equity-savings fund
By investing in debt instruments, derivatives, and stocks, equity savings funds hope to find the optimum mix of risk and return. The portfolio diversification of these products ensures that market volatility has no effect on their performance. The funds' exposure to stock gives the economy the much-needed boost for growth, while their exposure to debt and derivatives provides stability. These funds are structured to have at least 65% of their portfolio made up of equities and equity-linked instruments. In contrast, the remaining portion of the portfolio is made up of fixed-income securities.
Tips you consider while choosing a suitable hybrid mutual fund
Risk-return assessment
Prior to making an investment in a scheme, it's crucial to evaluate its portfolio in order to determine the risks associated. In addition, the type of companies that the fund invests in is an important detail. For instance, in an equity-oriented hybrid fund, determine whether the fund invests primarily in large-cap, small-cap, or mid-cap companies to determine the level of risk involved and the potential rewards.
Investment profile
Before selecting a hybrid fund for investing, consider your own risk tolerance, investment horizon, and financial goals.
Taxation
Returns from equity investments in hybrid funds are taxed in the same manner as equity funds. As a result, short-term capital gains (STCG) are taxed at 15% and long-term capital gains (LTCG) beyond Rs. 1 lakh are taxed at 10% without indexation. The hybrid fund's debt investment returns are taxable like those of any other debt mutual fund. Capital gains increase the investor's income from debt funds, which are then taxed according to the appropriate income tax bracket. The debt component's LTCG tax is taxable at 10% without indexation and 20% with indexation.
Conclusion
Hybrid funds are the solution for you if you would rather choose your own investment funds but still want the simplicity of a single scheme with a well-diversified portfolio. Due to the variety of hybrid funds, it's critical to understand which one best fits your investing objectives, risk tolerance, financial objectives, and time horizon. The above characteristics might help you choose the best fund to maximise your return on investment.