HYBRID MUTUAL FUND

Copyright infringement not intended

Picture Courtesy:Economic Times

Context:

Mutual fund schemes are structured to manage money across assets like stocks, bonds, gold and investment trusts, but hybrid mutual funds are gaining popularity among the investors who find it difficult to rebalance investments on their own.

What is hybrid mutual fund?
Hybrid mutual funds are investment funds that combine both equity (stocks) and debt (bonds) in a single portfolio.Their goal is to balance risk and return by mixing growth-oriented assets (equity) with stable, income-generating assets (debt).

Why are they called “Hybrid”?

Hybrid mutual funds are termed “hybrid” because they combine two distinct asset classes i.e. equity, which offers higher return potential but carries greater risk, and debt, which provides stability and lower riskthereby creating a balanced investment structure that reduces volatility compared to pure equity funds while generally generating better returns than pure debt funds.

Types of Hybrid Funds:

Conservative hybrid fund: This category invests 10–25% in equity and 75–90% in debt, making it suitable for low-risk investors who prefer stable returns slightly higher than fixed deposits.

Balanced hybrid fund: These funds maintain an equal mix of 40–60% in both equity and debt, offering a moderate risk–return profile ideal for investors seeking balance.

Aggressive hybrid fund: With 65–80% allocation to equity and 20–35% to debt, these funds aim for equity-like returns while providing limited downside protection.

Dynamic asset allocation or balanced advantage fund: This category shifts between equity and debt automatically based on market valuations, making it suitable for investors who want professional rebalancing without manual intervention.

Multi-asset allocation fund: These funds diversify across at least three asset classes—typically equity, debt and gold—offering broad-based risk distribution for investors seeking multi-dimensional diversification.

Equity savings fund: By combining equity, arbitrage positions and debt instruments, these funds reduce volatility and suit low to moderate risk investors seeking steady but market-linked returns.

Advantages of Hybrid fund:

Hybrid funds provide diversification across asset classes, reduce volatility compared to pure equity investments, offer better return potential than traditional debt products, enable automatic rebalancing by fund managers and serve as an accessible entry point for new investors.

Risks:

Hybrid funds remain exposed to market fluctuations, with equity-heavy variants experiencing sharper declines during bearish periods, while the debt portion may face risks such as interest rate movements and credit defaults.

 How hybrid mutual funds help in tax planning?

• Equity-oriented hybrid funds (≥65% equity) get equity tax treatment, which is generally more tax-friendly than debt taxation.
• Long-Term Capital Gains (LTCG) above ₹1 lakh are taxed at only 10%, and gains up to ₹1 lakh are completely tax-free.
• Short-Term Capital Gains (STCG) on equity-oriented hybrids are taxed at 15%, which is lower than most income-tax slab rates.
• Lower tax outgo compared to FDs or recurring deposits, where interest is fully taxable as per slab.
• Debt-oriented hybrids may still offer better post-tax returns because only the gain portion is taxed, unlike FD interest which is fully taxable.
• Automatic rebalancing reduces frequent buying/selling, helping lower tax-triggering transactions inside the fund.
• Tax-efficient compounding occurs inside the fund, since taxes apply only when the investor redeems, not annually.
• Suitable for long-term investors wanting better post-tax returns without taking full equity risk.

Conclusion:

Hybrid mutual funds offer a balanced investment pathway by blending the growth potential of equity with the stability of debt, making them versatile instruments suited to varied risk profiles; their structured diversification, automatic rebalancing and moderated volatility make them a practical choice for investors seeking long-term, steady wealth creation without taking the high risks associated with pure equity funds.

Source:Economic Times