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Hybrid funds invest in multiple asset classes, primarily equity and debt. They are best suited for investors who look for equity like long term returns while cushioning against extreme volatility in the market.
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In mutual funds, asset classes refers to categories of instruments which are grouped together based on their risk / return characteristics. The most common asset classes are equity, debt, gold and real estate; Asset allocation refers to the mix of asset classes (% equity, % debt etc) in your investment portfolio. Asset allocation balances risks / returns and help you achieve your financial goals. Hybrid funds are mutual fund schemes which invest in multiple asset classes e.g. equity, fixed income, gold etc. These schemes provide investors exposure to multiple asset classes and asset allocation benefits thereof.
The most common asset allocation strategies involve equity and debt asset classes. Hybrid mutual funds are designed for investors seeking a risk profile between a pure equity portfolio or pure debt portfolio, offering the growth potential of equities along with the safety of fixed-income securities. However, hybrid funds can provide you exposure to other asset classes also like gold, real estate etc. Various types of hybrid funds cater to different risk appetites. Depending on their equity allocation, the tax treatment of hybrid funds can vary from scheme to scheme.
Hybrid mutual funds have been around in India for many years now. Among extant hybrid funds, the oldest vintage is 25 – 30 years. As per AMFI July data, total assets under management (AUM) in hybrid funds is around Rs 5.5 lakh crores which is around 12% of mutual fund industry’s open ended schemes AUM (source: AMFI, 31st July 2023). Hybrid mutual funds are popular among investors who do not have high risk appetites. Some hybrid funds also give regular dividends / IDCW; as such, they are also popular with investors who need regular cash-flows.
Hybrid mutual funds are unique financial instruments because they invest in multiple asset classes. Often, these funds invest in both Equity and Debt. Sometimes, they expand their portfolio to include assets like Gold or Real Estate. The core philosophy driving hybrid funds rests onasset allocation. Different hybrid funds have different asset allocation strategies, catering to different risk appetites and investment needs. Significant evidence presented by scholars and industry practitioners suggests that combining asset classes with relatively low or negative correlation of returns can effectively reduce a portfolio's overall risk and provide stability of returns. This is where hybrid mutual funds shine. They diversify investments across several asset classes to secure returns while minimising associated risks. SEBI has asset allocation mandates for different categories of hybrid funds, however, fund managers also have considerable flexibility in deciding allocation to each asset class within the SEBI mandates. The asset allocation strategies are guided by the specific investment objectives of the fund and the prevailing market conditions.
Hybrid funds have twin investment objectives:
Depending on the mandate of the hybrid scheme, some hybrid funds will tilt towards capital appreciation, and some will focus on income and stability of returns. This will be captured in the Scheme Information Document (SID) under ‘Asset Allocation’. When making asset allocation decisions, hybrid fund managers always keep these objectives at the forefront. They diligently assess the market, ensuring the right asset allocation in equity, debt and other asset classes.
Types of Hybrid Funds
SEBI has classified Hybrid funds into 7 sub-categories as follows. Among these,SEBI has allowed an AMC to launch only one of the two – a Balanced Fund and / or an Aggressive Hybrid Fund,
Factors to consider when investing in Hybrid Mutual Funds
Tax Implications on Hybrid Mutual Funds
The taxation of hybrid funds will depend upon its average monthly equity allocation over the last 12 months.
Income distribution cum capital withdrawal (IDCW) or dividends paid by hybrid funds will be added to your income and taxed as per your income tax slab. Consult with your financial advisor or mutual fund distributor to understand the tax implications of hybrid mutual funds so that you can choose the best hybrid mutual fund for your investments.
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