Saturday 4 July 2020

Do hybrid mutual funds actually balance out your portfolio?


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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.