Hybrid schemes Funds are a popular way of investing in the stock market, as they offer diversification, professional management, and convenience. However, not all mutual funds are the same. There are different types of mutual funds that cater to different risk appetites, investment goals, and time horizons. One such type of mutual fund is the hybrid fund.
What are hybrid schemes funds?
Hybrid funds are investment vehicles that allocate their portfolio across a combination of both equity and debt securities. They aim to provide both capital appreciation and regular income to investors. The proportion of equity and debt in a hybrid fund can vary depending on the fund’s objective, strategy, and market conditions.
There are different categories of hybrid funds, such as:
Aggressive hybrid funds: These funds invest 65–80% of their assets in equity and the rest in debt. They are suitable for investors who have a high risk tolerance and a long-term investment horizon. They can offer higher returns than pure debt funds but also carry higher volatility and risk.
Balanced hybrid funds: These funds invest 40–60% of their assets in equity and the rest in debt. They are suitable for investors who have a moderate risk tolerance and a medium-term investment horizon. They can offer a balance between growth and stability but also carry moderate volatility and risk.
Conservative hybrid funds: These funds invest 10–25% of their assets in equity and the rest in debt. They are suitable for investors who have a low risk tolerance and a short-term investment horizon. They can offer lower returns than pure equity funds, but they also carry lower volatility and risk.
Dynamic asset allocation funds: These funds invest in equity and debt in varying proportions depending on market conditions. They use various indicators, such as valuation, momentum, and sentiment, to decide the optimal asset allocation. They are suitable for investors who want to benefit from market opportunities but also want to reduce the downside risk.
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Equity savings funds: These funds invest in equity, debt, and arbitrage opportunities. Arbitrage opportunities are situations where the same asset is priced differently in different markets, allowing the fund to earn risk-free profits by buying and selling simultaneously. These funds are suitable for investors who want to earn higher returns than pure debt funds but also want to reduce the tax liability on their gains.
Why invest in hybrid funds?
Hybrid funds can offer several benefits to investors, such as:
Diversification: Hybrid funds invest in both equity and debt, which can help reduce the overall risk and volatility of the portfolio. Equity and debt tend to have a low or negative correlation, which means they do not move in the same direction at the same time. This can help cushion the portfolio from market fluctuations and provide more consistent returns.
Flexibility: Hybrid funds can adjust their asset allocation according to market conditions and the fund’s objectives. This can help the fund capture the upside potential of equity when the market is bullish and protect the downside risk of debt when the market is bearish. This can also help the fund avoid the timing and selection errors that individual investors may make while switching between asset classes.
Tax efficiency: Hybrid funds can offer tax efficiency to investors, especially in the case of equity-oriented hybrid funds. These funds are treated as equity funds for tax purposes, which means they are subject to a lower tax rate than debt funds. The long-term capital gains (LTCG) on equity funds are taxed at 10% (plus surcharge and cess) if they exceed Rs. 1 lakh in a financial year.
The short-term capital gains (STCG) on equity funds are taxed at 15% (plus surcharge and cess). On the other hand, the LTCG on debt funds is taxed at 20% (plus surcharge and cess) with indexation benefit, and the STCG on debt funds is taxed at the investor’s slab rate. Moreover, equity savings funds can also take advantage of the arbitrage opportunities, which are taxed as equity gains, to enhance their post-tax returns.
Goal-based investing: Hybrid funds can help investors achieve their specific investment goals, such as retirement, education, marriage, etc. Depending on the risk profile, time horizon, and expected return of the goal, investors can choose the appropriate category of hybrid fund. For example, an aggressive hybrid fund can be suitable for a long-term goal, such as retirement, while a conservative hybrid fund can be suitable for a short-term goal, such as an emergency fund.
How do you tweak investments in hybrid funds for a balanced portfolio?
Investing in hybrid funds can help investors create a balanced portfolio, but it is not enough to just invest and forget. Investors need to periodically review and tweak their investment in hybrid funds to ensure that they are aligned with their risk-return trade-off, asset allocation, and investment goals. Some of the factors that investors need to consider while tweaking their investment in hybrid funds are:
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Risk appetite: The investors need to assess their risk appetite, which is the amount of risk they are willing and able to take in their investment. Risk appetite can vary depending on the age, income, expenses, liabilities, and personality of the investor. Generally, younger investors have a higher risk appetite than older investors, as they have more time to recover from market downturns and benefit from compounding.
Similarly, investors with higher income and lower expenses have a higher risk appetite than investors with lower income and higher expenses, as they have more surplus to invest and less dependency on their investment income. Investors need to tweak their investment in hybrid funds according to their risk appetite. For example, investors with a high risk appetite can invest more in aggressive hybrid funds, while investors with a low risk appetite can invest more in conservative hybrid funds.
Asset allocation: The investors need to decide their asset allocation, which is the proportion of equity and debt in their portfolio. Asset allocation can depend on the risk appetite, time horizon, and expected return of the investor. Generally, a higher proportion of equity can offer higher returns but also higher risk and volatility, while a lower proportion of debt can offer lower returns but also lower risk and volatility.
The investors need to tweak their investment in hybrid funds according to their asset allocation. For example, investors who want a higher exposure to equity can invest in aggressive or balanced hybrid funds, while investors who want a higher exposure to debt can invest in conservative or dynamic asset allocation funds.
Investment goals: The investors need to define their investment goals, which are the specific financial objectives they want to achieve with their investment. Investment goals can vary depending on the amount, duration, and priority of the goal. Generally, a higher amount, longer duration, and higher priority of the goal can require a higher return but also a higher risk, while a lower amount, shorter duration, and lower priority of the goal can require a lower return but also a lower risk.
The investors need to tweak their investment in hybrid funds according to their investment goals. For example, investors who have a long-term goal, such as retirement, can invest in aggressive or balanced hybrid funds, while investors who have a short-term goal, such as an emergency fund, can invest in conservative or equity savings funds.
Conclusion
Hybrid funds are investment instruments that diversify their holdings between equity and debt securities. They can offer diversification, flexibility, tax efficiency, and goal-based investing to investors. However, the investors need to periodically review and tweak their investment in hybrid funds to ensure that they are aligned with their risk-return trade-off, asset allocation, and investment goals. By doing so, the investors can create a balanced portfolio that can help them achieve their financial aspirations.
SBI Equity Hybrid Fund: This fund invests 65–80% of its assets in equity and the rest in debt. It is suitable for investors who have a high risk tolerance and a long-term investment horizon. It has an expense ratio of 0.67% and a 3-year annualized return of 25.67%.
ICICI Prudential Multi Asset Fund: This fund invests in equity, debt, and gold. It is suitable for investors who want to diversify across multiple asset classes and benefit from market opportunities. It has an expense ratio of 0.74% and a 3-year annualized return of 24.19%.
HDFC Balanced Advantage Fund: This fund invests in equity and debt in varying proportions, depending on market conditions. It is suitable for investors who want to reduce the downside risk and capture the upside potential of equity. It has an expense ratio of 0.75% and a 3-year annualized return of 24.81%.
What sets hybrid funds apart from balanced funds?
Hybrid funds and balanced funds are both types of mutual funds that invest in a mix of equity and debt securities. However, they have some differences in their investment objectives, asset allocation, and risk-return profiles.
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Investment objectives: hybrid funds aim to provide both capital appreciation and regular income to the investors, while balanced funds aim to provide a balance between growth and stability to the investors.
Asset allocation: Hybrid funds can invest in equity and debt in varying proportions depending on the fund’s category, strategy, and market conditions. Balanced funds, on the other hand, have a fixed asset allocation of 40–60% in equity and 60–40% in debt.
Risk-return profiles: Hybrid funds can have different risk-return profiles depending on the fund’s category and equity-debt ratio. For example, aggressive hybrid funds have a higher risk and return potential than conservative hybrid funds. Balanced funds have a moderate risk-return profile, as they try to reduce the volatility and risk of equity by investing in debt.
