5 Things You Need to Know About Hybrid Funds or Balanced Funds

Introduction

A wise way to approach your investments is to have a balanced portfolio. It means that your investment portfolio must contain a mix of risk levels that offer you both aggressive and conservative approaches moderately. Let's say you prefer to choose your own investments. But you're unsure of which funds you need to invest or how much you need to hold. This is where hybrid funds come in, as they contain multiple asset classes within the same fund. If you want to what are hybrid funds and how they can work for you, here are five things you need to know.

1. What Hybrid Funds Mean

A hybrid or a balanced mutual fund is a fund scheme that invests in both equity and debt. Each balanced fund has a combination of equities and debt instruments targeted at specific kinds of investors. The fund aims to build a balanced portfolio and offer regular income to investors, including capital appreciation in the long run. A single hybrid fund provides you with:

• Asset Allocation: Distributes the money among various asset classes.
• Correlation: Co-movement of returns of the assets.
• Diversification: Offers more than one asset in the portfolio.

2. Types of Hybrid Funds

Every hybrid fund has a unique asset allocation between equity and debt. In this regard, they are classified under the following types. They are:

• Equity-Oriented Hybrid Funds:

  Invests at least 65% of its total assets in equity and equity-related instruments. The remainder, 35%, is invested in debt and money-market securities.

• Debt-Oriented Hybrid Funds:

  Invests at least 60% of its assets in fixed-income securities and the remainder 40% into equities.

• Balanced Funds:

  Invests a minimum of 65% of total assets in equity and equity-related securities and the remainder in debt securities.

• Monthly Income Plans:

  Primarily invest in fixed-income securities and a small portion into equities and equity-related securities.

• Arbitrage Funds:

  The fund manager purchases stocks at a lower cost in one market to sell them at a greater price in another while continuously looking for arbitrage opportunities to maximize the fund's returns.

Choosing a hybrid fund gives you the benefit of investing in equity and debt and the convenience of investing in a basket of products without the hassle of rebalancing at regular intervals. 

3. Offers Simplicity and Diversification

Investing in hybrid funds can streamline your investment decisions. Since the scheme offers a balance of stocks and bonds, it can help temper any large swings within your portfolio's value. Since the fund invests in diverse assets, new investors who are unsure about entering direct equity can look to hybrid funds thanks to the stability it offers in its debt components and the exposure it provides through its equity securities. It can cushion you against extreme market volatility and help you make the most out of equity investments. Investing in hybrid funds through a Systematic Investment Plan (SIP) can be a smart way of achieving your financial goals. You can choose to invest a fixed amount at regular intervals and watch your investments grow in the long run.

ADDITIONAL READ: Benefits of Investing through SIP

4. Better Returns Than Pure Debt

Historically, hybrid funds have been known to offer good returns. These funds perform well when the stock market is volatile due to the safety of debt securities. Hence, the fund is better able to withstand market shocks in a downward trend.

5. Important Factors to Consider

Before investing in a hybrid fund, understand the following:

• Risk-Return Assessment:

  Analyze the scheme's portfolio to know the risks involved in it. Find out the kind of stocks owned by the fund. For instance, in an equity-oriented hybrid fund, learn whether the majority of the stocks held by the fund are large-cap or small and mid-caps to understand the kind of risks involved and the returns you can expect.

• Your Investment Profile:

  Look into your risk appetite, financial objectives and investment horizon before selecting a hybrid fund.

• Understand Taxation:

  Within hybrid funds, the equity component of the fund is taxed like equity funds, that is, Long-Term Capital Gains (LTCG) of more than Rs 1 lakh is taxed at 10% without indexation, and Short-Term Capital Gains (STCG) is taxed at 15%. The debt component of the hybrid fund is taxed like any other debt mutual fund. This means when capital gains are added to your income, you will be taxed as per the applicable income tax slab. LTCG tax from the debt component is taxed at 20% post indexation and 10% without indexation.

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Conclusion

If you want to pick your own funds but prefer the convenience of a single fund that offers you a fully diversified portfolio, hybrid funds can be best suited to you. But since there are different kinds of hybrid funds, it is essential to know precisely the type you're investing in and the fund's strategy based on your risk appetite, financial goals, and time horizon. To help you choose suitable hybrid funds, a financial advisor can help you select the right funds that meet your investment profile.