Are you impressed by the perfect mix of diversification and better returns of the Hybrid Funds? Do you want to start investing in them right away? Then, we have listed down things you should do before investing in hybrid funds!
Hybrid mutual funds are mutual funds that invest in many asset classes. They are typically a mix of equity and debt assets, including gold or even real estate.
Asset allocation, correlation, and diversification are three key ideas underlying hybrid funds. Asset allocation is the act of selecting how to allocate wealth among various asset classes, correlation is the co-movement of asset returns, and diversification is the presence of multiple assets in a portfolio.
Why Hybrid Funds?
Investors wishing to make a medium-to-long-term investment might consider hybrid funds. A cautious investment approach could help you achieve the desired risk-adjusted returns using hybrid funds.
Investors frequently struggle to establish the correct mix of risk and profit.
Investors find it difficult to strike the correct equilibrium between risk and returns. Unfortunately, neither of them can be ignored. If you accept a higher risk compared to the risk you can afford, you will end up losing money. On the other side, if you’re very risk cautious, you can end up with insufficient returns, delaying your progress toward the financial goals that you have set. So, if you’re seeking an investment product that can balance what risks you take and the returns you get, hybrid mutual funds are a good option. These funds will ultimately help you in controlling risks associated with them and hence put a step forward in creating desirable returns as you will now be investing in a mix of funds that belong to both debt and equity assets types.
Now that we know why hybrid funds prove to be one of the choices for investment let’s get a step ahead. Before you start investing in Hybrid funds, several things must be done.
What Things you Should do Before investing in Hybrid Funds?
The listed pointers will help you plan your hybrid funds’ investment a little better!
Know the kind of Hybrid Funds that will work for you
There are different kinds among the Hybrid funds that are made accessible in general. These are namely balanced hybrid funds, conservative hybrid funds, multi-asset allocation funds, aggressive hybrid funds, dynamic allocation funds, and arbitrage funds. A conservative fund allots somewhat 75% of its total assets to debt. Debt and equity are usually distributed evenly when we talk about the balanced fund. An aggressive fund’s equity assets must account for nearly 65% of total assets. A dynamic fund’s asset ratio changes when market conditions change. Assets from a minimum of two varied asset classes are comprised of in multi-asset allocation funds. Finally, close to 65 percent of an arbitrage fund’s total assets must be invested in equities. The basic purpose of fund management is to profit from price variations.
As a result, investors should carefully pick hybrid funds after evaluating the risk associated with them and return necessities. Aggressive hybrid funds, for example, have a higher risk profile since they tend to have higher equities exposure, but they can likewise provide a better return rate than the typical conservative funds.
Select funds that match your Financial Goals.
You might have a set of financial objectives in mind, therefore you should prefer a distinct hybrid fund that aligns with them. For the long-term goals, you could invest in aggressive funds, while for mid-term goals, you could invest in a cautious fund. For example, if you’re nearing retirement, you might select a cautious hybrid fund to reduce your risk of losing money while still earning a respectable return.
Assess Various Indicators of Hybrid Funds
While selecting funds, assess different indicators of Hybrid funds such as the returns, risk, time, cost, etc. This assessment will help you opt for the funds that are best suited for you.
Returns
Even though these funds are low-risk investments, it is always wise to remember that any mutual fund investment, whether equities or debt funds, will involve some risk. Moreover, the risk element will be significant since hybrid funds include an equity component.
Risk
While talking about associated returns, hybrid funds fall midway between pure debt and pure equity funds. Returns are not as high as those of equity funds, but they are higher than typical debt funds.
Cost
Hybrid funds are best suited to investors with a medium-term time horizon of 3-5 years. The greater the time horizon, the more likely you will achieve consistent, higher profits.
Time Horizon
Like all other mutual funds, hybrid funds impose a fee called expense ratio. The investor benefits from a lower expenditure ratio. Although a high expense ratio impacts fund returns, it is not always the case that a high expense ratio equals low returns.
Investment Strategy
It’s crucial to remember that the fund managers choose the assets to invest in, the proportions in each asset, and the investment style. Investors have no control over how the various components are selected or blended.
Thoroughly Check on the Expense Ratio
The investment return that you get can be dramatically reduced if you have a high expense ratio. Therefore, when choosing any kind of hybrid fund, make sure to look at the expense ratio. While a few hybrid funds’ NAV increases sound tempting, the returns of fees may be limited if the expense ratio proves to be high.
Get a clear idea of the taxes that apply on Hybrid Fund Returns
Hybrid funds that have an entire asset allocation in the equity class of more than 65 percent are taxed similarly to equity funds. The fund is taxed like a debt fund if the ratio of assets allocated to equity is smaller than 65 percent. Long-term capital gains on equity-oriented hybrid funds close to Rs. 1 lakh are tax-free in a financial year, but LTCG over Rs. 1 lakh is taxed at a rate of 10%. In equity-oriented hybrid funds, short-term capital gains are taxed at 15%. The LTCG on the funds that are oriented towards debt is taxed for a 20% index-linked rate, while the Short-term capital gains are taxed at the investor’s slab rate.
The Takeaway
Conservative investors can expect consistent returns from debt funds while taking chances with the equity component of hybrid mutual funds. Even within hybrid funds, the sheer diversity of portfolios available, ranging from those with more robust equity components to those primarily debt-based, provides investors with plenty of options to select from, depending on their risk appetite. Finally, a prudent investment strategy with hybrid funds could aid you in achieving the risk-adjusted returns you desire. Before making a final decision, look at ratings of all the funds you’ve shortlisted, as well as their performance history, the risks that they, and the grade of asset classes they invest in.
