Hybrid Funds – A Balance of Equity and Debt Funds

Hybrid Funds - A Balance of Equity and Debt Funds

Mutual fund investors can be divided into 3 categories based on their risk tolerance. The equity market is known as a volatile market because equity investments have higher risks whereas debt market investments have low risks and the third category we have is hybrid funds. Hybrid Funds refer to the combination of both equity and debt market investment because every investor has different goals so it is hard to categorize them in any single category, This is where hybrid fund strangely is useful. In a hybrid fund strategy, a unique investment scheme can be planned for every investor.

Types of hybrid funds

Equity oriented hybrid funds – In equity-oriented hybrid fund 65% investor’s money is invested in equity-related instruments across various market caps such as small, medium, and large caps along with different sectors, and the remaining 35%  money is invested in the debt fund market.

Debt oriented hybrid funds – In debt-oriented hybrid fund 60-6% of asset is invested debt fund and debt-related instruments like bonds and government securities etc, the remaining 35-40% is invested in the equity market and equity instruments.

Monthly income plans – This hybrid fund scheme invests the majority portion of assets in the debt market and debt instruments, approximately 15-20% can be invested in the equity market so usually this combination can generate higher returns than debt fund alone. This scheme provide regular income to an investor in the form of interest and dividend, the investor has the option to choose monthly, quarterly, semi-yearly, or yearly payout option.

Arbitrage hybrid funds – Arbitrage funds primarily focus on buying stock/shares when it reaches low points and sells it at higher price. Fund managers continue to search for good arbitrage opportunities although good arbitrage opportunities are not always available at that time fund manager focus on investing debt market. This combination of investment can offer good returns to investors.

Balanced funds – Balanced funds invest 65% of assets in equity or equity instruments and the remaining is invested in debt securities. They consider equity funds for taxation and provide tax relief on long term gains up to 1 lakh.

Factors to keep in mind before investing in hybrid funds

Here are important points to keep in mind before investing in hybrid funds.

Risk management – Hybrid fund market investment comes with risk which depends on in which market you are investigating so it is always recommended to study and research properly before putting your hard-earned in the market.  If you investing in an equity-oriented hybrid fund than you must first research the company in which you are investing, the company belongs to which market cap such as a small, medium, and large-cap. You should also research regarding balance and net worth of securities along with their complete financial history. If you are investing in small-cap securities than you must keep in mind risk and reward ratio is always high in small cap securities because of high volatility on the hand if you are investing in large cap securities than risk and reward ratio is limited usually large cap securities are stable and less volatile as compare to small cap securities.

Tax factor – Tax is another important factor to keep in my before investing in hybrid funds. You may get exemption on tax on long term capital gains below 1 lakh and above 1 lakh tax can be 10% without indexation.  Tax on short terms capital gains can be 15%.

Who can invest in hybrid funds?

Well, the short answer is almost anyone can invest in hybrid funds because it offers a wide range of investment opportunities from equity to debt market. Peoples of all age group can enter in this scheme and peoples from every income background can invest in the hybrid fund. Nature of your investment is always depends upon you and your risk tolerance because market offers you both high and low risk investment options. You can invest from short to long term duration that usually depend on your investment goals and aspirations.

Team R Wealth

Team R Wealth

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