Thinking of investing in hybrid mutual funds? Making
a choice between debt and equity is always tough and advisors usually advocate
investment planning on the basis of the conditions in the market and age among
other factors. If you are an investor who does not want to undergo the sheer
hassles of making investments in a multifarious product basket which has to go
through rebalancing periodically, hybrid funds are your best option.
Deploying investments in hybrid mutual funds
India
will
help you tap into the potential of both debt and equity as per experts. Equity
based hybrid funds will have exposure exceeding 65% for equity and the
remainder will be allocated for debt. Similarly, debt based hybrid funds will
have around 70-75% allocated for debt instruments and the remainder will be
deployed across equity. Owing to their unique nature, hybrid funds are also
referred to as balanced funds at times.
Vital
things worth noting about hybrid mutual funds
Hybrid mutual funds
usually come in the form of asset allocation based funds, funds for capital
protection and also MIPs or monthly income plans. They offer the best of both
debt and equity investments while lowering risks automatically through
diversification. Returns have been steady from such funds over the last few
years as per reports. They have ensured close to 18% in returns over the last
3-4 years in comparison to 23% of returns enabled by the BSE (Bombay Stock
Exchange) Sensex.
There are some hybrid funds which have generated
returns to the tune of even 25% or more annually. Over the last 5 years, these
funds have performed substantially better than the Sensex by offering 10% or
more returns in comparison to a rise of 5% for the benchmark index. These funds
usually perform better whenever markets are witnessing difficulties since debt
works like a cushion. This makes them better suited towards withstanding any
sudden drops/falls in markets. At the same time, when markets rise rapidly,
they may not perform as strongly as peers which have 100% equity components.
Rebalancing on the basis of circumstances in these
markets also work magnificently for such funds. Balanced funds which function
on a 70-30 ratio basis for exposure for equity and debt respectively, work well
in this case. Suppose there is a fall in the stock market. The exposure to
equity will fall and fund managers will have to purchase more shares for
keeping the 70% threshold intact. Debt in this case, offers the safety net. When
the market rises and allocation to equity goes up to 80%, managers will be
selling 10% of their portfolio in equities and purchasing debt for making
higher profits. The debt aspect is managed in a manner that offers less
volatility for the investment while lowering overall risks at the same time.
Remember that the chief objective of investing in
hybrid funds is diversification which is possible if both asset classes have
negative/low correlation. Choose on the basis of your strategy for allocating
assets. Equity based funds will be taxed similarly as regular equity funds.
i.e. STCG (short term capital gains) taxes will be taxable at 15% and LTCG
(long term capital gains) taxes will be nil.
