A balanced portfolio has the ability to mitigate the overall investment risk and allows the investor to fetch better returns in the long run. An investor’s portfolio must not have a completely aggressive approach. It must not have a completely conservative approach either. The best way to ensure that you have a well balanced portfolio is to allow diversification across risky and safe investment avenues. If you consider mutual funds for tending to your life’s financial goals, depending on any one asset class for income generation doesn’t make sense. Several mutual fund advisors recommend investors diversify their portfolios across equity and debt as they are inversely related. When equity performs, debt underperforms and vice versa.
However, thanks to the introduction of hybrid mutual funds, investors can get the best of both asset classes by investing in just one mutual fund scheme. A hybrid fund is an open ended mutual fund scheme that invests in more than one asset class to achieve its investment objective. Investors who wish to invest in a mutual fund scheme that leverages both equity and debt asset classes consider a hybrid fund.
If the idea of investing in hybrid funds seems apt to you, here are 5 things that you need to know before investing:
Some of you may not be aware but hybrid funds are also referred to as balanced funds. So next time you hear or read ‘balanced funds’ somewhere do not get confused as they are talking about hybrid funds only. The reason they are called balanced funds is that they try to balance an investor’s portfolio by providing the right mix of equity and debt. The investment objective of a hybrid fund with a balanced portfolio is to offer stability whilst generating long term capital appreciation.
There are 4 main types of balanced funds
There are equity oriented hybrid funds that predominantly invest in equity and then there are debt oriented hybrid funds that invest a majority of their investible corpus in fixed income securities. Multi asset funds invest in equity, debt as well as in gold. Arbitrage funds continuously look for arbitrage opportunities where they invest in buy low in one market and try to sell high in another market.
Invest in a diversified portfolio of securities
Since a hybrid fund invests in both stocks and bonds it has the ability to withstand market swings better than the equity and debt funds. When equity markets are underperforming, it directly impacts equity funds as they majorly invest in stocks. Similarly, debt funds are affected when interest rates fluctuate. However, hybrid funds are able to hold their ground during volatile markets because of their unique portfolio combination.
Aim to generate better returns than debt funds
Balanced funds may not be able to offer better returns than equity funds, but they aim to deliver better than debt mutual funds. Historically, hybrid funds have always outperformed debt funds because their investments in equity allow them to generate better returns in the long run.
Taxation on hybrid funds
The equity component of a hybrid fund is taxed like equity funds where a 10% tax is levied on gains exceeding Rs. 1 lakh. On the other day, the debt component is treated as debt funds where investments held for more than 3 years are taxed as long term capital gains, and anything lower than that is taxed as short term capital gains.