Hybrid Funds, also known as Balanced Funds mainly aim to achieve wealth appreciation from a long-term growth perspective and generate income in the short-run through a balanced portfolio. We all prefer a balanced approach to life. Some like to spend a lot of hours at work while the rest prefer spending a larger amount of time for leisure, and there are balanced personalities who like to divide an equal amount of time for both the activities. Same reasoning applies in case of other things in life; a balance between work and professional life, a balance between leading a healthy life along with physical activities; and of course with respect to your investments which differ with different factors like time horizon, markets, goals, liquidity, risk-taking capacity, similar to this what maintaining a balance between equity, debt and other asset classes looks like.
How do Hybrid Funds work?
The fund manager is responsible to allocate your money in varying proportions in equity or debt which would be basis your investment objective. If the fund manager decided to distribute your investment portfolio in the ratio of 65% for equity and the rest for debt, it is called as an equity-oriented fund. At the same time, for the sake of liquidity, a little portion of investment is allocated for cash equivalents.
Suitability for Investors
Hybrid Funds are considered to be a lot safer than equity funds. They provide higher returns in comparison to pure debts and are most opted amongst conservative investors. Early investors who are keen on trying their hands in the equity market can think of hybrid funds as an initial step since these are a perfect blend of equity and debt. On the other hand, for the less conservative group of investors, a dynamic asset allocation of some of the hybrid funds is a great source of pooling in the most out of market fluctuations.
With this, there are a few more categories which are not so popular, yet have their own pros and cons:
• Monthly Income Plans – Hybrid funds predominantly focused in debt instruments are called MIPs. They would barely invest about 15-20% into equities which would allow greater returns than regular debt funds. MIPs are known for providing regular income to the investors in the form of dividends.
• Balanced Funds – These are the most favored type of hybrid funds that invest at least 65% of their portfolio in equity or equity-oriented instruments. This enables them to qualify as equity funds for the purpose of taxation. This means that any gains over and
above Rs. 1 lakh from the balanced funds for a time-span of over 1 year are taxable at the rate of 10%.
• Arbitrage Funds – These are equity oriented mutual funds that attempt at taking an advantage of the fluctuations in the price of a stock between the derivatives market and futures market. The fund manager often look for such opportunities in order to maximize the returns by purchasing stocks at a lower price and selling it at a higher price in another market.
With mutual funds providing a diverse range of schemes under hybrid funds, right from aggressive to conservative; it is one of the most suitable options for a beginner to a retiree.