What is Hybrid Funds?
Also known as Balanced Funds or asset allocation funds, Hybrid Funds are mutual funds that provide a combination of more than one underlying investment asset class, such as stocks, bonds or cash.
The “hybrid” descriptor comes from the idea that one mutual fund consists of a mix of different elements typically existing in two or more funds. Most often, hybrid funds are a combination of stocks and bonds and the fund will have a stated objective, such as aggressive, moderate or conservative.
Types of Hybrid Funds:
- Equity Oriented Hybrid Funds
These funds are more tilted towards equities i.e. they have more exposure to equities then debt. Balanced funds fall in this category. Since equity exposure is high volatility of these funds is also higher.
For risk averse investor these funds may fall in very high risk category but in general they are an ideal investment options for long term. The performance of these funds has been at par with diversified equity funds which make them an attractive investment avenue.
- Debt oriented Hybrid funds
This category has many varieties named as conservative, moderate or aggressive funds. The exposure to equity and debt varies within these schemes.
- Other Hybrid Funds
There are few other mutual funds schemes which can be termed as hybrid funds. First one is the arbitrage funds. These funds aim to capture arbitrage opportunities in the cash and derivative market and invest a sizeable portion in the debt segment.
Ever since debt funds taxation was increased these funds attraction have also increased due to considered lower volatility and equity taxation. But investor needs to understand that these are equity funds and so there is risk associated. The other funds which can be termed as hybrid funds are asset allocation funds which keep varying exposure to discussed asset classes.
Why invest in Hybrid Funds:
➡ Monthly Income Plan (MIP):
MIP schemes invest a major portion of the corpus in debt and money market instruments with a moderate exposure to equity. These schemes are suitable for investors who prefer to play safe and have a small exposure to the equity market.
Investors should invest in such schemes with a long-term perspective and not from a view of an investment instrument that yields monthly income. Just like any other mutual fund, the MIP too, comes with two options.
➡ MIP with Dividend option:
MIP’s with dividend option provides you an income in form of dividends. There is an option to receive this income monthly, quarterly, half-yearly and yearly. So you have to choose the option at the time of buying the MIP.
Note that while the dividend from MIPs are tax-free in the hands of investors, the company has to pay a dividend distribution tax of around 14% on the dividend before it reaches your hand. So your returns reduce by that much.
➡ MIP with Growth Option:
Here, the money is not paid out to you in forms of dividends, instead it keeps growing in the mutual funds. Hence your money is just growing inside the fund itself and you can reap all the benefits at the time of redeeming the funds in future.
In this option, you have nothing to do with dividends. Note that you get power of compounding in growth option because your returns also earn in future. Here is an article on difference between dividend vs growth option in mutual funds to give you a better idea of what I am talking about.
Hybrid funds have an exposure to debt. This protects your investment when stock markets are volatile or crash.
➡ Better than Debt Funds
When stock markets rise, or there is a bull run, the hybrid funds give better returns than debt funds.
➡ Natural Diversification
With an exposure to both equity and debt the hybrid fund is naturally diversified. You don’t have the headache of balancing the portfolio.
➡ Tax Benefits
Equity hybrid funds are treated as equity, for tax purposes. Long term capital gains are tax exempt, just like equity.
Advantages of Hybrid Mutual Funds:
- Obviously the most striking advantage is being able to switch over from one combination to the other available to a more aggressive growth oriented stocks when the market is bullish and vice versa.
- It provides diversity in true sense with portfolio containing top stocks and bonds for a blend of growth and safety.
- There is no trouble in managing an assortment of investments yourself. The one fund gives it all and reduces your overall problem of managing the investment.
Disadvantages of Hybrid Mutual Funds:
- Dependent on the expertise of fund manager with respect to changes in portfolio.
- May not give high returns as equity funds and underperform in bull market.
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