Some investors are heard complaining that their hybrid fund has not been giving them the desired returns for the past few years. It is only natural to expect decent returns from hybrid mutual funds, because hybrid mutual fund schemes diversify your investments and give you relief from the drawbacks of equity mutual funds and debt mutual funds, by providing capital appreciation through equity investing as well as stability and returns through investments in debt instruments.Hybrid mutual funds, like any other type of mutual fund scheme, attempts to increase the value of your investment through either capital appreciation or establishing a respectable level of returns. But these funds typically invest in a mix of stocks and bonds, requiring an investment of approximately 65-80 percent of their portfolio in equities. Such a portfolio is bound to be volatile. Nonetheless, hybrid funds employ asset allocation and portfolio diversification to ensure maximum returns at minimal risk.Hybrid funds are a great option for intermediate-term investors. They earn the “balanced” moniker by keeping a steady mix between stocks and bonds, usually placing about 60% of their assets in stocks and 40% in bonds. These funds offer simplicity, but the downside can be costs. You can often buy a short-term bond fund and a large-blend fund and pay less in annual expenses than if you had just bought a balanced fund. The modern portfolio theory in fund management gave way to hybrid mutual funds to offer varying levels of risk tolerance ranging from conservative to moderate and aggressive. Balanced hybrid funds often follow a standard asset allocation proportion such as 60/40. Some hybrid funds have a higher equity allocation, others have a higher debt allocation.[1] If at least 65% of the portfolio of hybrid fund is invested in equities, the fund can be termed an equity fund, for taxation. Thus, all the profit above INR 1 Lac over an annual term will be subject to 10% taxation only, and the rest can be safely used as cash reserve. The fixed income extracted from balanced hybrid mutual funds helps overcome the equity-related risks.[2]
Based on their asset allocation, hybrid mutual funds can be divided into the following types:
• Equity-Oriented Hybrid Funds: If 65% or more of the fund’s assets are invested in equities by the fund manager, and the remaining in debt, it is an equity-oriented fund. These equities include shares of companies in various sectors and industries such as finance, real estate, healthcare, etc.
• Debt-Oriented Hybrid Funds: If 65% or more of the fund’s assets are invested in debts by the fund manager, and the remaining in equities, it is an debt-oriented fund. This debt includes investments bonds, government securities as well as debentures. This share of equities and debts is balanced through a systematic asset allocation in the form of cash and cash-equivalent investments, that can provide liquidity to the investors in time of need.
•Monthly Income Plans: When a hybrid mutual fund has its main asset allocation in debt, investors benefit from it through a monthly income plan (MIP) that can generate higher returns than regular debt funds by providing up to 20% exposure to equities. MIPs also come with the growth option – they let the investments grow in the fund’s corpus. MIPs can be availed on a monthly, quarterly, half-yearly or annual basis. MIPs are hybrid funds that invest mostly in debt and partially in equities.
What are the 3 Best Hybrid Mutual Funds for me?
• CanaraRobeco Equity Hybrid Fund - Direct Plan: With a minimum investment of INR 5000 and minimum SIP of INR 1000, this plan from CANARA ROBECO ASSET MANAGEMENT CO. LTD offers long term capital appreciation and income from a portfolio constituted of equity related securities as well as fixed income debt and money market securities. Prominent companies such as HDFC Bank Ltd (6.35 %), ICICI Bank Ltd (4.57 %), Reliance Industries Ltd (3.95 %) and Larsen & Toubro Ltd (3.53 %) have their assets employed in this hybrid mutual fund.
• ICICI Prudential Equity & Debt Fund Direct Plan: With a minimum investment of INR 5000 and minimum SIP of INR 100, India’s leading asset management company (AMC), ICICI PRUDENTIAL ASSET MANAGEMENT COMPANY LTD. offers this hybrid mutual fund for those who wish to generate long term capital appreciation and current income from a portfolio by investing in equities and fixed income securities. Assets from notable companies such as ICICI Bank Ltd (5.81 %), BhartiAirtel Ltd (4.49 %), State Bank of India (4.31 %) and ITC Ltd (3.99 %) have been invested in this hybrid mutual fund.
• Mirae Asset Hybrid Equity Fund -Direct Plan: MIRAE ASSET GLOBAL INV (INDIA) PVT. LTD. offers this hybrid mutual fund with the aim of generating capital appreciation along with current income from investment in equities, and balance in debt and money market instruments. Having a minimum investment of INR 5000 and minimum SIP of INR 1000, this fund has been allocated in various sectors has investments from HDFC Bank Ltd (7.7 %), 7.17% Govt Stock 2028 (6.05 %), Reliance Industries Ltd (4.08 %), and ICICI Bank Ltd (4.01 %).
Why is it a wise decision to invest in Hybrid Mutual Funds?
An ideal blend of equity funds and debt funds, hybrid funds should be your first exposure in markets. The reason being, the debt component of the fund provides a cushion against extreme market turbulence while the equity component makes for higher returns. Instead of risking a total loss for the want of higher returns, it’s better to stay away from absolute equity exposure and turn to hybrid funds to ensure best of both worlds. They can help you stay stress free by providing stable returns.
This kind of dynamic asset allocation is very beneficial for those investors who are looking for the best schemes that can help their business stay firm even when the market fluctuations are relatively higher than usual. Hybrid mutual funds allow the fund manager to take advantage of arbitrage opportunities, by buying securities at a low price in one stock exchange and selling them at higher prices.