Different types of hybrid funds are available in the market; But what should you invest in? It is very important to know this.
Often, it is difficult for investors to find the right balance between risk and return. You cannot ignore any of these. If you take more risk than you are capable of, you may have to bear the loss. On the other hand, if you do not take any risk at all, you may get inadequate returns which may delay your journey to achieve your financial goals on time. Therefore, if you are looking for an investment instrument in which to balance between risks and returns, then you can consider investing in hybrid mutual funds. These funds can help you invest in a mix of debt and equity assets classes to effectively manage the risks and achieve the desired returns.
Different types of hybrid funds are available in the market; But what should you invest in? Also, how long should you invest in a hybrid fund? I have discussed some things that you might find useful if you are considering investing in a hybrid fund.
What type of hybrid fund would be suitable for you?
Hybrid funds are categorized based on their asset allocation ratio. There are six types of hybrid funds available – Conservative hybrid funds, balanced hybrid funds, aggressive hybrid funds, dynamic allocation funds, multi-asset allocation funds, and arbitrage funds. At least 75% of the total allocation is invested in the Conservative Fund in the debt category. In a balanced fund, allocation is usually made in the same ratio in debt and equity. At least 65% of the total assets are invested in equity assets in aggressive funds. In dynamic funds, the asset ratio varies according to market conditions. Multi-asset allocation funds consist of more than two asset classes. Finally, in arbitrage funds, equity accounts for at least 65% of the total assets. The focus of the fund manager is to profit from the difference in price in different markets.
Therefore, investors should choose a hybrid fund after carefully evaluating their risk appetite and return expectations. For example, aggressive hybrid funds have a higher risk associated with them because they invest more in equities, but can also provide higher returns than conservative funds.
Investing in sync with financial goals is important
You may have several financial goals, and you should choose a hybrid fund that matches your goals. For example, for a long-term goal, you can invest in aggressive funds. For the medium-term goal and to avoid loss, you should choose Conservative Fund. If you are about to retire, you may prefer Conservative Hybrid Fund to reduce the possibility of loss so that you can get a decent return on investment.
Check the expense ratio before investing
The expense ratio can reduce your return on investment. When choosing a hybrid fund, you must check its expense ratio. Some hybrid funds appear attractive in terms of NAV growth, but after deducting the charge, the returns may be lower as the expense ratio is higher.
What is the ideal investment period?
Hybrid funds are suitable for investors who want to invest in the medium to long term. Equity-oriented hybrid funds, such as aggressive hybrid funds, are ideal for long-term investment, while debt and balanced funds can also be opted for in the medium-term.
Understand the tax applied on the return of hybrid funds
Hybrid funds in which 65% of the total asset allocation is invested in equity class are taxed in the same manner as equity mutual funds. If less than 65% is allocated in equity asset, such funds are treated as debt funds for computing tax. Equity-oriented hybrid funds are exempted from tax on long-term capital gains (LTCG) of up to Rs 1 lakh during a financial year and taxed at a rate of 10% over Rs 1 lakh. Equity-oriented hybrid funds are taxed at the rate of 15% on short-term capital gains (STCG). Debt-oriented hybrid funds are taxed at the rate of 20% on LTCG, and are also provided with indexation benefits, while STCG is taxed according to the tax slab rate applicable to the investor.
Finally, practical investment approach can help you achieve desired risk-adjusted returns through hybrid funds. Before finalizing your decision, make sure to check the rating of your selected funds, their return track-record, associated risk and type and quality of the asset class. If you are unable to make informed decisions, do not hesitate to consult a certified investment advisor.
