5 Things to Know about Hybrid Funds

If you are someone who wishes to improve their current financial status, then you need to start investing. The amount of money one needs to invest or the investment instrument through which one needs to invest may solely depend on the amount of financial gains one is seeking. Also, investors are expected to keep their financial goal aligned with their age, risk appetite, investment horizon and existing liabilities. Having a financial goal always helps because it might help investors in identifying a scheme that aligns with their investment objective.

Mutual fund investments can be one of the investment tools for people of all ages who wish to invest their hard earned money and in order to possibly build a corpus in the long run. Yes, we say long run because investors having a long term investment horizon for mutual fund investments may not have to worry about the current market fluctuations. Since mutual funds predominantly invest in equity, they do carry some amount of risk. Hence, it is necessary for investors to first identify their risk appetite before picking any investment scheme.

It is possible to classify mutual fund investors into three broad categories- those who do not wish to take any risk, those who invest aggressively and do not mind holding a risky portfolio and those who wish to blend the best of both. The third category of investors may prefer to invest in balanced funds or hybrid funds. This article focuses on hybrid funds.

But before we start, let us try and get some basic concepts cleared.

What are hybrid funds?

Hybrid funds are a category of mutual funds which predominantly invest in both equity and debt instruments. The ratio of investment in debt or equity may solely depend on the fund’s objective. Hybrid funds offer a balance between returns and risks for investors seeking capital appreciation and stability. Money invested in equities gives your investment the much-needed push. At the same time, debt instruments give you the much-needed cushion against market volatility, thus providing a balance between risk and return. Invest across asset classes also gives diversification benefit. The kind of hybrid fund you should invest in depends on your risk preferences and investment objective.

Investment strategy of hybrid funds

Hybrid funds generally aim to succeed in seeking wealth appreciation over a long period of time. At the same time, it tries to strategize and generate short term gains through a balanced portfolio. The fund manager usually allocates the pool of fund collected from investors in varying proportions in equity and debt based on the investment strategy opted by the fund. The fund manager may also buy/sell securities to take advantage of market fluctuations.

Now that we have the fair idea about mutual funds and hybrid funds, let’s take a look at a few other things that you need to know before investing in hybrid funds:

1. Asset allocation: As stated earlier, hybrid funds invest in debt and equity. But the proportions are never fixed and may differ from one hybrid scheme to another. For example, an aggressive hybrid fund may allocate a higher proportion of assets in equity and one the contrary, a more conservative hybrid fund may invest a major proportion of assets in debt and debt related instruments.
2. Risk and returns: Like all mutual funds, hybrid funds too, carry some amount of risk. Since all hybrid funds invest some proportion in equity, that percentage of assets is exposed to market volatility. Investors seeking an aggressive profile may opt for a hybrid fund that invests largely in equities, whereas investors with low-risk appetite may opt for a conservative hybrid fund. Also since this fund invests in equities, returns may fluctuate and are never guaranteed.
3. Expense ratio: Like all mutual fund schemes, owning a hybrid fund has its costs too. Hybrid funds having a higher expense ratio may decrease your chances of receiving more returns. Hence, investors are expected to check the expense ratio of the hybrid fund before investing.
4. Investment horizon: Hybrid funds are a subcategory of mutual funds. Mutual funds hold the potential (no guarantee) to grow if they remain invested for an extended period. Hence investors with an investment horizon of three to five years or more may hold the potential to seek some capital appreciation from their hybrid fund investments.
5. Tax implications: If you invest in hybrid funds that invest majorly in equity, then your investment will be taxed like an equity fund. Equity funds held over a year with capital gains of over Rs. 1 lakh are eligible for LTCG of 10 per cent. For investments held for less than a year, an STCG of 15 per cent is applicable. Hybrid funds with less than 65 per cent equity are taxed like debt funds. A total LTGC of 20 per cent is levied on returns derived from debt mutual funds held for 36 months or more.

We hope that the above information about hybrid funds helps investors in making an informed investment decision.