How to choose a Hybrid Fund
Learn how to choose the right Hybrid Fund category as per your goals and risk appetite.
May 2024
3 mins read
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Hybrid Funds are gaining traction, which is evident by the steady growth in assets in this category. The assets under management under Hybrid Funds category has jumped from Rs 5.01 lakh crore in April 2023 to reach Rs. 7.77 lakh crore as of April 2024, shows AMFI data. Similarly, the number of folios in this category have grown from Rs. 1.21 crore to Rs. 1.36 crore during the same period.
So what’s the reason behind this astounding growth? Hybrid Funds give you the best of both worlds – debt and equity in one scheme. However, there are seven categories of Hybrid Funds. In this post, you will learn how to choose the right category as per your goals and risk appetite.
The purpose of investing in these funds are manifold:
For first-time MF investors
You may be new to market linked investing and transitioning from traditional products to equity is better managed by taking a middle path by opting for a Hybrid Fund which allows you to benefit from equity market upside but limits the fall in return in case of extreme volatility or corrections.
Looking for better returns
If you have a time horizon of 3-7 years, Equity Funds may seem too volatile in this period and at the same time it’s long enough to desire better returns as compared to pure fixed income type investing. Hybrid Funds fit in well here.
Seeking low volatility
Lastly, you may just be looking for less volatility in the portfolio and picking the most suitable type of hybrid fund can help.
Risk
These funds can witness drawdown when equity markets correct – depending on which category and equity/debt composition. The benefit of Balanced Advantage Funds is that they may be able to protect the downside to some extent as compared to pure Equity Funds during volatile markets as they can reduce the equity exposure. Balanced Advantage Funds tweak their equity/debt allocation based on filters such as PE, interest rates, medium to long term outlook of the asset classes, and other macro- economic factors.
You may consider investing some portion of your portfolio in this category. Since some of these funds tend to have a large cap bias, you may need to invest separately in Mid and Small Cap categories for diversification. These funds may not deliver returns on par with a pure Equity Fund which can invest as high as 95% into equities.
Under the BAF category, the extent of equity exposure can vary across funds. Some funds may be aggressively managed (higher equity exposure) while some funds can have relatively low equity exposure.
What you need to watch out for
When you hear fixed income, you may tend to think about stable returns. The first step is to be aware that there are high yield fixed income investment options too and they come with high risk too. Bonds default and you can potentially lose money. When it comes to Hybrid Funds, the fixed income portion of the portfolio is ideally not meant to chase high yield or return because that part of the job is done by the equity side of the portfolio.
Hence, step two is to look for Hybrid Funds whose fixed income portfolios are of high credit quality and carry low risk of default, along with low interest rate risk.
When you look at the type of Hybrid Funds, a Conservative Hybrid Fund or a Multi Asset Hybrid Fund which limits the exposure to volatile equity assets, can help with the requirement of stability in returns. Lastly, be conscious that these are ideally suited for investment horizon of 3-5 years.
Taxation
Equity oriented Hybrid schemes will be taxed as per equity taxation. So, this means that if you hold for less than a year your gains will be taxed at 15% which is the rate of short term capital gains in equity and if you hold for more than a year then long term capital gains exceeding Rs 1 lakh are taxed at 10%.
Balanced Hybrid Funds invest in the range of 40% to 60% in equities and 40% to 60% in debt. Balanced Hybrid Funds qualify for indexation benefit. Gains realized after three years are taxed at 20% with indexation benefit. Investors should have at least three years of investment horizon in these funds.
In case of fixed income oriented hybrid schemes, any gains are taxed at your relevant income tax rate. Secondly, these are active funds and you have to be mindful of portfolio quality, expense ratios, fund management and investment style of both equity and fixed income portions of the portfolio.
5 filters to apply while choosing a Hybrid Fund:
- Decide your investment horizon and goal.
- Choose the category of hybrid fund depending on your goal and time horizon.
- Consider taxation aspect. Not all hybrid funds are taxed as equity funds.
- Asses the equity/debt exposure, style (value, growth).
- Check how much risk the fixed income portfolio is taking by looking at its
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(CIN - U74900MH2008FTC187029)
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All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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