Hybrid funds are types of mutual funds that invest in equities and debt instruments. This combination allows investors to receive steady earnings in the short-term, while at the same time aid in wealth appreciation over long term horizons.
In this article, we look at the various types of hybrid funds and their advantages.
Types of hybrid funds
Typically, hybrid mutual funds are classified as follows:
- Equity-oriented hybrid funds
These funds invest 65% or more of its assets in equities and the remaining 35% in debt and money-market instruments. Mostly, they invest in shares of companies across different industry sectors, including FMCG, mining, infrastructure, information technology, among others.
- Debt-oriented hybrid funds
These funds allocate 60% or more of its assets in debt and the remainder in equities. To maintain liquidity, they may also invest in cash and cash equivalents. The debt component constitutes investments in fixed-income earning instruments such as treasury bills, government securities, bonds, debentures, and more.
- Balanced funds
These funds invest a minimum of 65% of their portfolio in equity and equity-oriented instruments. Thus, they qualify as equity funds for the purposes of taxation. Any gains over Rs.1 lakh from balanced funds held for over a year are taxable at 10%.
- Monthly income plans (MIP)
Generally, MIPs allocate 15% to 20% of its portfolio to equities and the remaining to debt instruments. MIPs can be an ideal option as they offer two options – growth and dividend. The dividend option lets you earn profits at regular intervals. While, the growth option allows your investments to grow for the long term to build a corpus.
- Arbitrage funds
These funds make money by purchasing stocks at a lower price in one market and selling them at a higher price in another market.
Benefits of hybrid mutual fund investment
Following are the top mutual fund benefits of investing in hybrid funds:
- Balanced risk and return
Hybrid funds allow investors to reap maximum benefits by balancing the risk and return. On one side, the equity can fetch higher yields while debt can help earn steady returns at low risk.
- Ideal for first-time investors
For a novice investor looking to invest in mutual funds, hybrid funds can be an ideal option to gain exposure in equities steadily. Even when shares prices move up and down, the risk can be relatively lower.
- Lower expenses
Expense ratios for hybrid funds are usually on the lower side. This is because there is very little need for active portfolio management since there is a fixed proportion of bonds and stocks in most balanced funds.
If you are a new investor looking to invest in mutual funds online, you can start by investing in hybrid funds. They allow you to choose the perfect combination of assets based on your risk tolerance and investment goals.