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Planning To Invest in Hybrid Mutual Funds? A Few Key Things to Consider logo 05-04-2021 Adhil Shetty
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It’s often a difficult task for investors to strike the right balance between risk and return. You can’t ignore either of them. If you take a higher risk than what you can tolerate, you may end up accumulating losses. On the other hand, if you’re unnecessarily risk-averse, you might garner insufficient returns which can delay your journey to achieving your financial goals on time. So, if you’re looking for an investment instrument that could balance the risks and returns, you can consider investing in hybrid mutual funds.  These funds can help you invest in a mix of debt and equity asset classes to effectively manage the risks and generate desired returns.

There are different types of hybrid funds available in the market; but which one should you go for? Also, for how long should you invest in a hybrid fund? I’ve discussed a few pointers which you’re likely to find very useful if you’re planning to invest in a hybrid fund.

Which type of hybrid fund will suit you?

Hybrid funds are categorised based on their asset allocation ratio. There are six types of hybrid funds available — conservative hybrid funds, balanced hybrid funds, aggressive hybrid funds, dynamic allocation funds, multi-asset allocation funds, and arbitrage funds. At least 75% of the total allocation is invested into the debt category in a conservative fund. In a balanced fund, usually equal allocation is allowed to debt and equity. Under an aggressive fund, at least 65% of the total assets constitute equity assets. In a dynamic fund, the asset ratio varies depending on market conditions. Multi-asset allocation funds consist of more than two asset classes. Lastly, in an arbitrage fund, at least 65% of the total assets constitute the equity portion. The focus of the fund manager is to earn a profit on the price difference between different markets.

As such, investors should select a hybrid fund after carefully evaluating their risk tolerance and return requirements. For example, aggressive hybrid funds carry higher risk due to their greater allocation to equities, but they can also offer a higher rate of return than conservative funds.

Investing in sync with your financial goals is important

You may have several financial goals, and you should choose a hybrid fund that is aligned with your goals. For example, for a long-term goal, you may invest in an aggressive fund. For a medium-term goal, you should prefer a conservative fund to avoid losses. If you are close to retirement, you may prefer a conservative hybrid fund to lower the chances of losses and to earn a decent return on investment.

 Check the expense ratio before investing

The expense ratio can significantly reduce your return on investment. While selecting a hybrid fund, you must check its expense ratio. Some hybrid funds look attractive in terms of NAV growth, but the returns net of charges may be low if the expense ratio is high.

What’s the ideal investment tenure?

Hybrid funds are suitable for investors who want to invest for a medium to long-term purpose. Equity-oriented hybrid funds such as aggressive hybrid funds are ideal for long-term investments, whereas debt and balanced funds can be opted for a medium-term too.

Understand the taxes applicable on hybrid funds’ returns

Hybrid funds in which more than 65% of total asset allocation is into the equity class are taxed like equity mutual funds. If allocation into equity assets is less than 65% then such funds are treated like debt funds for tax calculation. Long-term capital gains (LTCG) up to Rs. 1 lakh in a financial year on equity-oriented hybrid funds is tax-exempt, whereas LTCG over and above Rs.1 lakh are taxed at a rate of 10%. Short-term capital gains (STCG) on equity-oriented hybrid funds are taxed at a 15% rate. The LTCG on debt-oriented hybrid funds are taxed at a 20% rate with indexation benefit, whereas the STCG is taxed at a slab rate applicable to the investor.

In conclusion, a pragmatic investment approach could help you earn the desired risk-adjusted returns through hybrid funds. Do check the ratings of your shortlisted funds, their returns track-record, the associated risks and the type and quality of asset classes that they’re invested in before finalising your decision. If you’re unable to make an informed decision, do not hesitate to consult a certified investment advisor.

The writer is CEO,

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